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John Wiley: A Profitable Academic Publisher?
Posted by: Patricio Kehoe (IP Logged)
Date: February 26, 2014 06:17PM
Investment gurus Joel Greenblatt (Trades, Portfolio) and James Barrow (Trades, Portfolio) recently added over 50% of John Wiley & Sons Inc. (JW.A)’s company shares to their stock portfolio, seeking to gain long term profits. And I believe this acquisition is a clever option for investors looking to benefit from a company with a wide economic moat. As a global publisher of print and electronic products, it generates half of its profits from the U.S market, through three diverse segments: the science, technology, medical, and scholarly unit (STMS) generates 60% of global revenue; the professional/trade segment, which accounts for 27% of revenue; and the higher education segment, which represents the remaining 13%.
A Wide Moat Rating Via Must-Have Products
With 10% market share of the global academic journal industry, John Wiley & Sons has established itself as one of the top publishers amongst academic institutions. It’s backbone, the STMS segment, publishes a wide variety of journals, ranging from titles owned by the firm, titles owned jointly with a professional society, and third-party owned titles, which are published under the Wiley name under seven year contracts. In addition to publishing, the company also owns the Wiley Online Library, an online distribution platform for its journals. Thus, many academics and institutional libraries consider the publishers’ books must-have content, therefore limiting competition and generating high profitability.
However, university library budgets have tightened over the past year, causing sluggish revenue growth of merely 1% in fiscal 2013, while excess returns maintained their high levels of 55% in the same year period. The slow sales trend has furthermore caused management to cut expenses by an annual $80 million, in order to maintain profit growth. In order to counterbalance the 14% sales drop in the education business, due to lower print book demands, Wiley acquired Deltak for $220 million in 2013. This purchase will allow the company to expand as an online education service provider, as the new business works with universities to develop online degree and certificate programs. Management expects the purchase to boost its Professional Solutions segment sales from 10% to 25% over the next five years.
While the Research business segment is bound to maintain slow, but steady growth, given its wide economic moat and the mini-monopoly conditions of the academic market, the future growth catalyst will be the education area. By diversifying its revenue income, and redirecting profits to jump-start growth in the digital university education space, the firm will benefit from average operating profit margins of 18% over the next five years, compared to the 15% average reported between 2011 and 2013. The firm’s cost cutting efforts, in addition to the Deltak business growth, should contribute to boosting EBITDA growth, which marked a negative trend of 2.50% since fiscal 2012. This, however, is congruent with the overall industry, which has been battling drops in print book sales.
While debt levels have risen from $475 million to $673 million in 2013, due to the Deltrak buy, free cash flow levels remain healthy and should continue to grow as the Professional Solutions segment takes flight. Returns on equity also remain strong, at 14.6%, while the company continues to pay a steady dividend yield of 1.73%. However, with the firm’s current P/E trading at a 38% price premium relative to the industry median of 17.90x, I would recommend investors to await first quarter earnings report before buying the stock. But I feel bullish about Wiley’s wide moat rating and believe it will be able to sustain growth levels against competitors like Pearson PLC (ADR) (PSO) or Reed Elsevier NV (ADR) (ENL) in the long term.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.
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