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Should I Buy Reed Elsevier plc?

I’m out shopping for shares again. Should I add Reed Elsevier (LSE: REL) (NYSE: RUK.US) to my wishlist? 

Printing money

After years of slowly chugging along, Reed Elsevier’s share price has been motoring lately. It is up 45% in the last 12 months, triple the 15% growth seen on the FTSE 100 in that time. Is there more good news to come?

When I looked at Reed Elsevier, back in February, I’m glad to say I nailed it as a buy. While the internet had sunk many traditional publishing models, Reed’s focus on trade publications and digital services was helping it steam ahead. “The market likes this stock, and so do I”, I concluded. And I still do like the stock, up to a point.

Exhibition stock

Reed’s latest management statement showed revenue up 3% in the first nine months of 2013, with the company on course to hit its full-year targets. As management put it: “The outlook remains unchanged, with underlying revenue, operating profit, and earnings growth on track for the full year.” There were positive underlying trends across all its main business areas, with Risk Solutions doing particularly well after posting 8% revenue growth, and Exhibitions up 5%. The financial position is strong, and Reed is generating plenty of cash. 

Roughly 80% of Reed’s revenues now come from electronic publications (rather than dreary old print) and its exhibitions and conferences businesses.I think these are strong, positive industries to be in, especially if the global economy continues to grow. It is also bullishly expanding into new products, markets and regions. Management has completed £550 million of share buybacks so far this year, and is now close to its year-end target of £600 million.

Reed ’em and weep

Back in February, Reed looked a steal at 12.8 times earnings. Today’s far pricier valuation of 17.7 times earnings is out of my range, although it may still tempt momentum investors. Despite a progressive dividend policy, including an 11% increase in the half-year dividend payment to 6.65p, this stock yields just 2.6% today, well down on February’s 3.6%. That’s the price of success. Forecast earnings per share growth of 7% in both 2013 and 2014 should lift the yield to 3%, but I still can’t get too excited about that.

Brokers remain positive, despite the recent share price surge, but for me, the moment has passed. Credit Suisse recently raised its target price from 620p to 815p, but that is still below today’s 886p. It remains neutral on the stock, and so do I. I’m glad I hailed Reed Elsevier as a buy in February, because today it looks more like a hold.

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> Harvey doesn't own any shares mentioned in this article.