The Industry Leader
A global information and solutions provider, Thompson operates in more than 60 countries delivering information to businesses and professionals. With headquarters in New York, the firm’s professional division spans across the law, tax, accounting, finance, education, reference information, corporate training, scientific research and health care segments of the publishing business, accounting for 40% of total revenues. The other 60% is accredited to its financial and risk division.
The main difference between the two divisions is the stability of the professional division, because activities are carried out at stable end markets that offer revenue growth opportunities. In great part, performance consistency is secured because those markets are not susceptible to economic downturns. Additionally, the company holds a dominant position in the U.S. for the legal segment, responsible for a quarter of total revenues. And, a business model based on subscriptions is behind constant revenues, counting for 80% of the total.
With respect to the financial and risk division, Thompson made an important statement when acquiring Reuters in 2008. The deal guaranteed the firm a ticket to the first league, and today sees eye to eye with industry giants like Bloomberg. However, an adverse economic environment has negatively impacted overall performance, while recovery was complicated by weak performance of the Eikon product. Prospects remain frail since sales do not recover, and management continues to look for alternatives to push for a turnaround.
Financially, Thompson is a moderate company due to high debt levels. Trading at 27.2 times its earnings, barely below the industry average, the stock is fairly priced. But, I remain bearish due to the lack of long-term outlook for the financial and risk division. This animosity is shared by gurus. Especially relevant is RS Investment Management, the guru with the largest position that has reduced its position by 39%. At last, gurus with smaller position, like Jim Simmons and David Dreman, share this pessimism and sold great parts of their holding.
The Academic Leader
Most commonly known as Wiley, John Wiley & Sons is a global publishing company focused on the academic segment, commonly known as STMS. The firm based in New York markets its products worldwide through a net of publishing, marketing and distribution centers in North America, Europe, Asia and Oceania.
At the moment, besides ranking among the most cited journal sources, Wiley will wrestle with difficulties in the textbook and journal segment. The current budgetary cuts suffered by libraries, which represent almost 70% of its customers, will limit the company’s ability to adjust price. The subscriber side of the business allows for price remarks, but these clients represent a minor share of total customers.
On another note, the digital is expected to bring in new rivals like Amazon and Apple that will eat away some market share. However, the company has entered the competition with some success through its brands eBook and WileyPlus. An opportunity opened by the digital era has been manifested by the acquisition of Deltak. In short, the firm is diversifying activities while working closely with colleges to develop and support online degree and certificate programs.
Financially, Wiley is very strong but indicators have stagnated during the last three years. Trading at 19.1 times its earning, carrying a 28% discount to the industry average, the stock is undervalued. I share Jim Simons, Chuck Royce and Joel Greenblatt’s optimism, the gurus holding the largest three positions because the Deltak operation has given the firm an edge over the competition, with a great potential for growth amid recent loses.
I prefer Wiley over Thompson, following the trend displayed by gurus. In opposition to Thompson, Wiley’s new product is going at a loss due to initial investments related to the growth of the business. Also, unlike Eikon, Deltak has proven successful with customers, and allows Wiley to provide a complete solution to help traditional colleges and universities to move their programs online.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.