Shares digital

Reed Elsevier (REL) – 623p, stop loss 498p

SHARES SUMMARY

The sale of the US education publishing business, planned sale of print magazines and purchase of ChoicePoint bolster the defensive nature of Reed Elsevier’s income, which should also be boosted by the cost cutting review.

Business:

A global leader in publishing for professional users in the business to business, legal and science and medical areas.

Vital stats:

Market Value: £6,851 million

Historic PE: 17.4

Prospective PE 2008: 15.8

Prospective PE 2009: 14

Sector PE (next 12 months): 16.7

1-month relative strength: 0.4%

1-year relative strength: 24.3%

Yield 2008: 3%

NMS: 25,000

Spread: 0.08%

After a promising start to 2007, when merger and acquisition activity prompted a flurry of interest, the media sector did badly yet again. The sector underperformed the FTSE All-Share for the seventh year in a row, and has now done so in every year since the TMT bubble burst in 2000, as concerns over the impact of digitisation upon traditional media business models continue to fester.

It may therefore seem foolhardy to select a media stock. But a stream of highly visible and resilient revenues, and a continued aggressive repositioning of the business mean Reed Elsevier looks a good bet to outperform not only its ailing peer group but also the volatile broader equity market.

Publishing giant Reed generated roughly 10% compound adjusted EPS growth during the 2001-2003 economic downturn, so it already has a track record of consistency. The Anglo-Dutch firm has since invested heavily to confront the challenge of digitisation head on, and the bulk of the necessary development spending in areas such as workflow publishing is now behind it.

As a result, nearly half of sales already come from online sources. Better still the reconditioning programme means the vast bulk of revenues now come from market segments which should not be too harshly impacted by any economic downturn.

Reed provides reference materials which are vital in the science, legal, education and medical arenas. Operations such as LexisNexis, in the legal arena, and university database indexing expert Scopus, both offer strong secular growth potential in growing addressable markets.

December saw Reed take one major step in further reshaping its business, when it closed out the sale of its US Harcourt Schools business. This deal got rid of a business which had persistently underperformed expectations.

Last week the publisher made two further decisive moves. Management revealed plans to sell the print magazine titles of its Reed Business Information division and also launched the £2.1 billion acquisition of US firm ChoicePoint. The deals have three benefits.

Firstly, ChoicePoint will position Reed as a leader in the fast-growing risk data analytics market. The company sorts out data which it then sells to insurers as they make underwriting decisions.

Secondly, ChoicePoint will take Reed’s online exposure up to around two-thirds of revenues.

Thirdly, the sale of its B2B magazines would slash Reed’s advertising exposure to barely 5% of sales, further decreasing the impact of any global slowdown upon the group’s profits.

Coming shortly after January’s payment of a thumping special dividend, these latest moves suggest last year’s change in the terms of executives’ long-term incentive plan (LTIP), from an earnings growth measure to a total shareholder return (TSR) metric, has focused management’s minds more firmly on shareholder value.

There are still risks. Reed has clung on to its exhibitions business, which does not sit easily alongside the desktop information publishing operations. Selling the magazine titles for a price acceptable to management and shareholders alike may prove easy in the current credit market environment.

Yet chief executive Sir Crispin Davis argues exhibitions offer excellent growth prospects and strong cash flow, while a new £100 million cost cutting programme should further quell any doubts about the seriousness of management’s intent to drive the business onwards and upwards.

by: Russ Mould