Is Bloomsbury a bargain now Harry Potter has flown the nest?
Deciding whether to invest in a company before or after pivotal results is a tough call to make. The beauty of value situations is that you can often afford to do both; buy a few before and if the price drops on worse than expected results or a gloomy outlook, use the drop to buy more as long as the underlying value remains.
Such may be the case with Bloomsbury Publishing (LSE: BMY).
The publishing group which has ridden the Harry Potter success wave for a long time is due to announce its final results for 2009 on 30 March. These may well be lack-lustre. Harry has flown the nest these days.
"Harry Potter and the Deathly Hallows" was the last volume of JK Rowling's series. One of the highest selling books in publishing history, it shone Bloomsbury's earnings in 2007. But the group has inevitably been finding life a lot harder without the magical wee fella waving his wand over earnings ever since.
Hagrid's balance sheet
On the other hand, the publisher's balance sheet is as strong as Hagrid. With its trading statement in January, Bloomsbury told us its end of year cash was likely to be in the region of £35m.
At the last full count at the end of June, net assets were £109m, whilst net tangible assets were £82m and profits before investment income and amortisation of intangibles came in at £1.2m. Yet at the current price of 116.25p, the company is valued under £86m.
The interims weren't howlingly bad, but they did demonstrate the difficulty of facing life without the trainee wizard, and sentiment has been against the company before and since as the share price has dropped like a quidditch quaffle in freefall. The shares stood at 150p last July, but almost reached £4 five years ago as Potter mania reached its zenith.
Life after Potter
The fall looks like it has put the shares into value buying territory. There is life after Potter for Bloomsbury.
The company is an established business which has been using its cash to make acquisitions here and there as it moves towards publishing "which is less susceptible to the vicissitudes of the consumer economy". This covers academic, professional, specialist publishing and income from long-term database contracts in which margins are better. Last April, for example, Bloomsbury published Wisden Cricketers' Almanack for the first time since its purchase.
The brokers agree. Their consensus is for earnings per share to be 6.9p when announced next week, rising to 7.39p next year. If achieved, this will place the shares on a price-to-earnings ratio (P/E) for 2009 of close to 17, falling to 15.7 for the year we're in.
This is by no means cheap, but take out the cash and it falls to a tastier 9.3 against enterprise value, whilst the net working capital of over a quid a share means the shares are cheap if the company makes any kind of sustainable profit.
Of more interest for true investors is what the company will be looking like a few years hence and, therefore, where the share price will be. If Bloomsbury's plans begin to bear fruit, earnings should look more stable and should steadily rise.
When to buy?
Short-term knee-jerk reactions usually provide the best long-term opportunities Bloomsbury is looking like value now Harry Potter's departure has made it a contrarian's delight.
The question is when to buy. Unfortunately, no-one can really answer this. It's all a question of your investing horizons. Once bought, Bloomsbury may take time to come good, but it should do given time and if it doesn't for any unforeseen reason, there's a lot of downside protection courtesy of the balance sheet.
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