UPDATE 5-McGraw-Hill profit falls as ratings demand slows

* Q3 EPS $1.21, misses Wall Street view of $1.23

* Adj net income $366.7 mln, down 2 pct vs year earlier

* Results hurt by lower textbook sales, slower markets

* Full-year EPS guidance narrowed to $2.81 to $2.86

* Financial information businesses excel

* Shares close down 0.4 percent (Adds closing stock price)

By David Henry

NEW YORK, Oct 20 (Reuters) - McGraw-Hill Cos Inc's (MHP.N) profit fell in the third quarter, missing analyst estimates, as torpid credit markets hurt its Standard & Poor's rating business, and textbook sales dropped.

The European debt crisis dampened corporate bond issuance during the quarter, cutting into demand for ratings, the company said Thursday. Meanwhile, textbook sales are under pressure as local governments, reeling from lower tax receipts, are slashing costs. Revenue fell 2.5 percent.

The bad news was tempered by stronger results in the company's market information businesses, which include Standard & Poor's stock indexes, Capital IQ corporate financial information, and Platts, which reports commodity prices.

"It was a mixed bag," said Piper Jaffray analyst Peter Appert. "The education business is terrible. The indexes and Capital IQ look great and Platts continues to perform exceptionally well."

With shareholders pressing for change and revenue headwinds setting back what have been its biggest businesses, the company said it is cutting at least $100 million of costs over the next 15 months. Third-quarter expenses for McGraw-Hill were $1.3 billion, down 2.7 percent from the same quarter last year.

The cost-cutting is a prelude to McGraw-Hill splitting itself into two public companies with appropriate expense bases, the company said. The conglomerate said last month it is going to divide itself into a markets data company and a textbook publisher.

Investors including the Ontario Teachers' Pension Fund and hedge fund manager Jana Partners have pressed the conglomerate to break itself up to boost shareholder returns, but their plans called for more asset sales and spin-offs.

McGraw-Hill is also facing political pressure linked to its Standard & Poor's rating unit. Ratings agencies have broadly been accused of enabling the financial crisis, and regulators and politicians are looking at how to reform the debt rating system.

The U.S. Securities and Exchange Commission has also targeted S&P for a possible civil lawsuit over its ratings of a collateralized debt obligation.

S&P stripped the United States of its top triple-A ratings in August, spurring criticism from politicians and others who view its methodology as flawed.

EUROPEAN WILD CARD

In the third quarter, net income from continuing operations declined to $366.7 million. On a per-share basis, the company earned $1.21, the same as its adjusted per-share earnings from last year's third quarter last year, as the company bought back shares.

The average estimate from analysts was $1.23, according to Thomson Reuters I/B/E/S.

Last year's third quarter had included a 2-cent gain from a divestiture.

McGraw-Hill's stock closed down 0.4 percent to $42.91 on the New York Stock Exchange. Some analysts estimate the total market value of the company at about $50 a share.

At S&P revenue fell 1.8 percent and operating income dropped 6.1 percent on an adjusted basis, the company said.

S&P's results would have been much worse but for the fact that the agency collects relatively steady fees for monitoring existing debt and providing ratings information to subscribers. Revenue for rating new debt declined 19.5 percent as global debt issuance plunged 37.7 percent in the quarter, the company said.

In the education segment, revenue and operating profit both declined by 11 percent on an adjusted basis. Revenue from elementary and high school material plunged 21 percent as states and local government held back on purchases. Revenue from higher education, professional materials and international business was flat.

In contrast, revenue from financial information products grew 18.4 percent to make that business roughly the same size as the credit ratings business in the quarter. Profits in the segment grew 31.2 percent. Platts' revenue rose more than 25 percent.

"We always thought the ratings business was the gem, but maybe the real gem is this collection of financial information businesses," said Appert.

CEO Terry McGraw said on a conference call that he is "cautious" but "hopeful" that the ratings business will perk up in the fourth quarter. There are some corporate bond and loan deals in the offing, he said.

McGraw called the European situation a "wild card." While the financial crisis there stalled bond issues, a resolution would likely come with new debt financing that will need credit ratings, he said.

"I think you're going to see a pickup in bond issuance in Europe," McGraw said. "The need is extremely high."

But for now, the company tempered its prior earnings guidance for the year to $2.81 to $2.86 per share. Three months ago the company had said it expected to report at "the top end" of the range of $2.79 to $2.89.

Representatives of Jana Partners and the Ontario pension fund declined to comment on the company's results. (Reporting by David Henry in New York; Editing by Derek Caney, Dave Zimmerman and Richard Chang)