Why Did McGraw Hill Stock Explode Higher Today?

Educational and professional publisher McGraw Hill (NYSE: MH) stock jumped 19% through 11:10 a.m. ET Wednesday after beating on earnings this morning.

Heading into the quarter, analysts only expected McGraw Hill to earn about $0.35 per share for its fiscal Q2 2026. Instead, the publisher reported a profit (adjusted for one-time items) of $1.40 per share -- and then raised guidance for the year.

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McGraw Hill's Q2 earnings

Not all the news was good. McGraw Hill reported a 2.8% revenue decline to $669.2 million, and generally accepted accounting principles (GAAP) profits declined 21% to just $105.3 million.

On the plus side, "re-occurring revenue" grew 6.5% to $422.4 million, and high margin digital revenue surged 7.6%. McGraw Hill said it gained "notable" market share in the quarter and expanded its use of "AI-powered tools," helping to grow gross profit margin 150 basis points to a healthy 79.2%.

Is McGraw Hill stock a buy?

What worries me most about McGraw Hill stock, though -- even more than the sales and profits declines -- is the steep falloff in free cash flow. Through H1 this year, McGraw Hill generated only $168.3 million in operating cash flow, barely 40% of the $412.5 million it generated in fiscal H1 2025.

Worse, capital expenditures rose as cash flow fell, such that H1 FCF was only $119.2 million, a 68% decline.

Granted, this still keeps McGraw Hill on track to generate nearly $240 million in FCF this year, and on a $2.2 billion market cap, that sounds attractive. Factor in $3 billion in net debt, however, and McGraw Hill's enterprise value-to-free cash flow ratio rises to nearly 22x.

With earnings falling and free cash flow falling even faster, I fail to see how that would make McGraw Hill stock a buy.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.