When it comes to premium information services, this company rules the roost.
The media and publishing industries have managed to make a tidy penny over the years by controlling the flow of information but recent technological changes, particularly the rise of the internet and satellite television, have dealt a major blow to many of their business models.
Newspapers are coming under enormous pressure as sales and advertising revenue fall whilst television companies are losing much of their audience thanks to multi-channel TV and the fracturing of their local monopolies. Film and record companies' sales are falling thanks to file-sharing and competition from other sources of entertainment, particularly computer games, whilst the spread of eBooks is presenting the book and magazine publishing business with a new challenge.
One of the defining phrases of our age is "information wants to be free" although Stewart Brand's quotation ended with the corollary that "Information also wants to be expensive... that tension will not go away."
One of the many media companies that are found at the expensive end of the spectrum is the Anglo-Dutch specialist publisher, Reed Elsevier (LSE: REL), with brands such as New Scientist, Gray's Anatomy (the medical textbook, not the television programme) and the accountant's favourite bedtime reading, Tolley's Tax Guide.
Anatomy Of A Business
If in your student or professional life you subscribe to a specialist journal, yearbook or database, it is quite likely that it is produced by one of Reed's subsidiaries. Reed operates in sectors where its customers are still prepared to pay a premium price for access to information. Whilst the internet is an amazing resource if you're using the likes of Google and Wikipedia you won't have the accuracy, certainty and reliability of specialist sources such as Reed's Nexis news database.
Reed is an Anglo-Dutch dual-listed company, where two separately quoted companies operate under a single corporate structure and profits are distributed in a pre-determined proportion. The British side dates back to the book and magazine publisher Reed Publishing whilst the Dutch contribution is the science publisher Elsevier. This structure is very rare but a few of the world's largest companies such as Rio Tinto Group (LSE: RIO) and Unilever (LSE: ULVR) are also dual-company status.
Reed has four divisions; Reed Business Information (business and general magazine publishing), LexisNexis (the Lexis legal database, insurance, intelligence and taxation), Elsevier (scientific and medical) and Reed Exhibitions (the world's largest organiser of trade exhibitions). Elsevier and LexisNexis represent the core of the company and produce about 80% of its operating profits.
Last year Reed acquired the American data aggregation company Choicepoint which provides intelligence upon individuals for, amongst other things, credit scoring, insurance risk assessment and criminal background checks. A growth industry in these surveillance-happy times!
A Funny Thing About Goodwill
Reed's 2008 statutory earnings per share (eps) fell by 56% to 22.1p whilst its dividend rose by 12% to 20.3p. These figures put the shares on a fairly high price-earnings ratio of 21.3 with a dividend yield of 4.3%. The 2009 interim eps fell by 50% to 7.1p whilst the dividend was increased by 2% to 5.4p.
Reed prefers to use an adjusted eps figure which it produces by adding back any goodwill write-offs, one-off costs for acquisitions and to ignore those deferred tax provisions which are unlikely to ever crystallise. This is a contentious topic because accounting standards require that goodwill is depreciated, which reduces profits, but many investors argue that goodwill write-offs do not accurately reflect the situation where there is no evidence of brand impairment and thus understates the reported profits.
Reed's balance sheet contains a lot of goodwill from acquisitions; by not depreciating goodwill the adjusted eps will exceed the statutory eps. For 2008 the adjusted 2008 eps increased by 24% to 44.6p, whilst the 2009 interim adjusted eps were 24.5p, up by 21%. By using the adjusted eps the PE ratio falls to 10.6 which is below the market average.
The table below summarises Reed Elsevier's results for the last five years, showing steady growth in both adjusted eps and dividends. Note that in contrast the statutory eps have been extremely volatile.
| Year | 2008 | 2007 | 2006 | 2005 | 2004 |
|---|
| Statutory eps | 22.1p | 49.7p | 25.6p | 18.6p | 12.0p |
| Adjusted eps | 44.6p | 35.9p | 33.6p | 31.5p | 31.8p |
| Dividend | 20.3p | 18.1p | 15.9p | 14.4p | 13.0p |
Reed's balance sheet contains some £10.5 billion of assets of which £7.8 billion is goodwill and intangible assets. Investors who dislike debt should look away now; the total liabilities are £9.9 billion of which just under £5.5 billion is debt.
Some Interesting Prospects
A recent trading update provided some welcome good news for investors with the company saying that its businesses were "proving more resilient than most but not immune from late cycle pressures given the subscription nature of much of the revenue."
However, the Chief Executive recently resigned after just eight months in the job and Reed's shares have not taken part in this year's market rally, falling by 7% in 2009, due to a mixture of concerns about the effects of the global recession, increasing competition, the loss of the CEO and the level of debt. Reed raised £824 million in a share placing last July specifically to reduce its debts.
Only 14% of Reed's 2008 turnover came from advertising, making Reed far less dependent upon advertising than many other media and publishing companies. Reed's shares pay a nice dividend and its subscription based business model produces a more secure income stream than most other publishers, barring dramatic developments, but it remains for investors as to how much they are prepared to rely upon the adjusted eps figures in preference to the statutory eps.
More from Tony Luckett:
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> Tony owns shares in Unilever
