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Value Idea Contest: John Wiley & Sons (JW.A) Offers Margin of Safety

April 07, 2013 | About:
Chandan Dubey

Chandan Dubey

97 followers
Company: John Wiley & Sons (JW.A)

Cash: $256 million

Pension: $146 million

LT Debt: $475 million

Shares/Price/Cap: 61.27 million/$37.36/$2.23 billion

EV: $2.85 billion

BusinessPublishing, high moat protected by copyright laws
ManagementVery good. The founding family still plays a role.
Financial StrengthVery strong. History of strong balance sheet.
ValueSells for an EV of 9 times FCF. Dividend CAGR of 14% and yield of 2.1% with payout ratio of 23%.


1 History



In 1807, Charles Wiley, opened a print shop in New York City. His son John took over the company in 1826 after Charles’s death at the age of 44. For the next 65 years John continued as a bookseller and publisher in the U.S. and Europe, publishing works of Edgar Allan Poe, Herman Melville and Victor Hugo, among others. Gradually John moved into scientific, medical and other non-fiction publishing. Over the next several decades John and his sons took advantage of tremendous opportunities in science and technology and laid a solid foundation for Wiley’s worldwide reputation. They continued their expansion in architecture, construction, agriculture, chemistry and engineering. By the early 1900s Wiley had become a leading publisher in science and technology.

In 1961, Wiley acquired Interscience and went public in 1961. Its postwar focus on textbook publishing for colleges increased until it became the largest contributor to revenue by the 1980s. Charles Ellis concentrated on improving profitability and gaining market share by acquisitions. He acquired Alan R. Liss (a leading publisher of journals and books in life sciences) in 1989, VCH (a German scientific publisher) in 1996 , and Van Nostrand Reinhold (publisher of books and electronic products) in 1997. Publishing partnerships were also helpful in revenue expansion; for example, through an alliance with the American Cancer Society, the company became publisher for their flagship journal "Cancer" in 1995. In 1999, Wiley acquired some of Pearson's portfolio and later became the publisher of the "For Dummies" series for Hungry Minds in 2001.

In 2007, Wiley completed its largest acquisition yet by buying Blackwell Publishing.

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The company has two kinds of shares - Class A and Class B with 49.9 million and 9.5 million in number respectively, at the end of May 2012. Each share of Wiley’s Class B stock is convertible into one share of Class A. The holders of Class A stock are entitled to elect 30% of the entire board, while Class B for the rest. On all other matters, Class A has 1/10 of the voting power of Class B shares.

2 Business



Wiley operates in three separate divisions: 1) STMS or Scientific, Technical, Medical and Scholarly, 2) Professional Development and 3) Global Education.

The company produces journals, books, references, database services, advertising; professional books, subscription products, certification, training services; online teaching and learning resources. Wiley has used technology to its advantage by offering content efficiently to its customers around the world.

Wiley and its acquired companies have published works of more than 450 Nobel Prize winners across the categories of literature, economics, medicine, physics, chemistry and peace.

The company has a wide moat. Most of its publications are protected by copyright restrictions. Furthermore, it has a good brand recognition among its customers, i.e., professors, scientists, and publishers. This makes sure that Wiley gets good quality publications from its clientele.

There has been a some backlash among its customers about the business model of Wiley. Some scientists are of the view that Wiley copyrights works that the scientists have done and reviewed. Then Wiley goes ahead and charges outrageous sums for articles and license. In essence, the public pays for the salaries of the people who produce the work, and then again,to access it. It is hard to say how much damage will be done because of this backlash. At the moment the revenue has been going up by a 9% CAGR since 2002.

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The company has been a consistent long-time performer with high barrier to entry. Following is the chart of their margins (gross, operating and net). It has been very stable as you can see from the picture.

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Wiley also has a proven track record with acquisitions with predictable cash flows. Furthermore, the FCF has grown at a compounded 11.3% in the last 10 years (from $106 million in 2003 to $312 million in 2012).

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3 Financial Strength



Wiley has been a conservative company and does not like to leverage its balance sheet too much. They have done their acquisition in a smart way by a buying and paying down debt cycle. Looking at the debt/equity chart below, we see the peak representing acquisition of Blackwell Publishing and how the debt was soon repaid.

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The company paid interest of $7.7 million in 2012, a mere pittance against its operating income of $255 million.

The company has an agreement with Bank of America and The Royal Bank of Scotland for a $700 million five-year senior revolving credit facility, which can be drawn in many currencies. The company has an option of borrowing at following floating interest rates i) LIBOR + 1.05%-1.65 % ii) USD at base rate+0-0.65%, EUR at base + 1%. The variable rate depends on the leverage ratio of the company. Wiley also holds an option to request credit limit increases up to $250 million in increments of $50 million, subject to the approval of the lenders.

Currently the company has $475 million in LT debt, which is all owed to the revolving credit facility.

4 Management



Stephen M. Smith is the current president and CEO of the company and has a service record of 21 years at Wiley. He started as Vice President of Wiley Asia and by 2009 was COO of the company.

The company has a history of good management practices - low leverage, good acquisitions, low burn ratio due to option awards, and no significant share dilution. Furthermore, the RoIC has also been quite good averaging around 10% in the last 10 years.ZhZOt0nXxdjgBDdGNgfNSeJFY6IKihRv1JHqmvbc

The company pays the management in options, too. The following were the outstanding options at the end of April 2012.

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During the fiscal year 2011, the board approved a buyback of up to 4 million shares of Class A or Class B stocks. This increases the the numbers of shares to 8 million. During the year 2012 the company bought back 1.86 million stocks at an average price of $46.69.

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5 Risks



We already discussed the risk of backlash among its clientele because of Wiley’s business model.

The company’s publications are protected by government copyright acts. The law protects the publications for specific periods of time; in most cases the author’s life + 70 years and in any event at least 50 years for works published after 1978. The ability of profiting from this law depends on the company’s ability to protect its intellectual property rights and the regulations that are there to do so.

Introduction to new technology might also be a source of risk. Given the global reach of anyone with a computer, it is possible to share and collaborate without using journals and letters. If the brand name of Wiley suffers or people get fed up paying a lot of money for these journals, then they might publish and collaborate without any restrictions. There are already a few online journals in computer science, for example, which protest Elsevier’s cost structure.

6 Valuation



Given the high barrier to entry business, consistent growth and cash flows, proven track record for acquisition and good management - the company should trade at a premium.

Even if we ignore it, we see that the company has an EV of $2.82 billion, an EV of 9 times FCF, quite cheap in my opinion.

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The company also has a very good dividend history with a compounded annual growth rate of nearly 14%. The company has a payout ratio of 23% which leaves much room for growth. At current price the company has a dividend yield of 2.1%.

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Bottom line: This is a strong, safe and undervalued company operating in a business which has a large barrier to entry. The company has a solid management and a very good history of acquiring businesses in their core markets. It has low debt and sells for 9 times the enterprise value. A strong buy in my opinion.

[/i][i]Additional disclosure: Data taken from Morningstar.com, GuruFocus.com, Wikipedia, the annual reports and corporate website of John Wiley & Sons. The graphs have been made using GuruFocus 10-year summaries and Google docs spreadsheet.

[b][/b]

About the author:

Chandan Dubey
I invest because I want to be free by the time I reach 40 years of age i.e., 2025. My investment style is to find a small number of bets with large margins of safety. I pay a lot of attention to management and their incentive. Ideally, I like to buy owner operator businesses. I am fortunate to have a strong inclination towards studying. I aid my financial understanding by extensive reading in psychology, economic, social sciences etc.

Rating: 3.6/5 (18 votes)

Comments

yuruvalue
Yuruvalue - 4 months ago

Just to flesh out your valuation a little more, what do you see as future growth prospects of the company and what are your thoughts on capital allocation and how they would create value? What is the FCF number that you've used to get 9x EV/FCF, have you made adjustments and do you view that as representative of a sustainable number? You commented that 9x was cheap - what kind of multiple would be outside fair value and why? Interested to hear your thoughts on this.

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