Reed Elsevier NV (ENL) is a diversified publisher and information provider. It works on a wide range of market segments that include scientific, technical and medical (STM); legal; risks solutions and business information and exhibitions. The key of the company’s growth, however, lies almost exclusively in two brands: Elsevier and LexisNexis.
Elsevier handles the STM publications. This sector represents 34% of the company’s sales and holds the most solid economic moat. It publishes journals and books that are considered essential for scientific and medical research and counts on a stable subscriber base that is not likely to diminish any time soon. LexisNexis Group provides computer-assisted legal research devices. It holds 28% of the company’s sales, and has a solid share of the legal research market and a good number of growth opportunities.
The future of the company’s other businesses is more uncertain. Reed Risk Solution and Business Information — a provider of data services — had the biggest growth in 2013, but the brand faces significant competition and has no perspective of attaining an economic moat. The same could be said about the segment that hosts business events, Reed Exhibition. This brand could be considered the largest fish in its industry; however, it has less than a 10% share of the market, an endless number of competitors, and little chance of getting ahead.
In the last years, new technologies have forced the publishing market to sustain a wide range of structural changes, but the STM publishing sector has been relatively exempt from these transformations. This provides Elsevier with a stable operating profile. Considering that the firm holds 25% of this industry and is three times bigger than its closest competitor, it is quite safe to say that this segment will grow according to predictions.
There is, though, a small cloud on the horizon. It concerns the controversy that started with mathematician Timothy Gowers’ statement in January 2012. Gowers called for boycott of Elsevier, referring to its journals' high subscription prices and in support of the SOPA and PIPA measures. Today, more than 14,000 researchers stand within this statement. This could be a threat if open access publishing gains more relevance but has no effect on the firm’s growth in the middle term.
On the legal information market, the biggest challenge could be to win the battle over its greatest rival, Reuters. Between the two, they control over 75% of the industry.
But the rivalry loses its meaning when we take into account the must-have importance of both publications and the tendency to overlap clients. The real next frontline is about gaining influence in the more competitive Europe, where access to online information is still limited. LexisNexis already enjoys 20% of its market, and will probably take advantage of the growth opportunities.
Structural changes are necessary for the Business Information and the Exhibition segments. Reed Elsevier intended to sell the BI segment on 2009, but was impeded by the frozen credits markets. The brand was then reshaped, but constant innovation and new tools are still needed to get ahead of the competition. The brand now holds most impressive numbers; its underlying revenues grew 8% in 2013. But this is mainly due to a government’s demand for fraud detection policy that can disappear at any time.
What to Expect
Despite its less predictable segments, Reed Elsevier seems to assure mid-term steady progress. We trust the company’s policy of letting go of the non-core operations will lead to structural changes in its organization. Its free cash flow is being used to buy back some stock. Six hundred million were bought back last year, and they just promised to do the same in 2014.
The price per share has now surpassed $44 and EPS stand at $17.90, above the industry median of 18.60. However positive these numbers, it’s important to consider that the firm’s growth is partially based on its risk solution segment, which is highly dependent on government policies. So, despite the fact that the stock trades at 18 times the company’s earnings, below its peers’ mean and median valuations, it looks slightly overvalued to me.
While Reed Elsevier is certainly a safe investment, it might be better to wait for better timing to invest. Most gurus certainly think so; only Sarah Ketterer (Trades, Portfolio) bought the stock lately, while most of the other prominent investors betting on the firm maintained their positions unchanged.
Disclosure: Vanina Egea holds no position in any stocks mentioned.