Stock in Focus: Magic from Bloomsbury Publishing
Last year, I was away with a close group of friends from university when one of them disappeared from an evening of wine, cheese and boardgames because she was addicted to the book she was reading and ‘had to find out what happened next’. This was slightly out of character and the rest of us were puzzled until she told us that she was reading Harry Potter - for the first time!
I was jealous, I wish I could read Harry Potter again for the first time. And I imagine I am one of many 30-something-year-olds who first read the tales of the boy wizard as children and would love to read it all again without knowing what happens. When it was first published, The Times Literary Supplement described it as a book that would “join a small group of children’s books that will be read and re-read into adulthood”. They were right - I would guess that I have read each book at least 15 times and listened to Stephen Fry’s audiobook version more than 100-times through.
It has been 26 years since Nigel Newton’s daughter begged her Dad to publish Harry Potter and The Philosopher’s Stone. Joanne Rowling (her name in 1997 before it was decided that her books might do better if she de-gendered her name) had been turned away from many book publishers when Bloomsbury decided to take a bet on her and her world of magic. Within a year 763,000 copies of Philosopher’s Stone and its sequel Harry Potter and The Chamber of Secrets had been sold worldwide. In 1998, Chamber of Secrets became the UK’s best-selling hardback book - one of only a handful of children’s books to ever top the best-seller list - and Rowling was being compared to CS Lewis and JRR Tolkien. That year, sales at Bloomsbury rose 11% to £15m, thanks in no small part to the storming success of the children’s literature division, spearheaded by Harry Potter.
The year Bloomsbury published Potter, the company also went through a structural change. The six operating divisions were consolidated into two, to improve focus and expand margins. The company also decided to publish fewer new books, but focus on those with longer potential print runs. Almost three decades later, Harry Potter is not only still in print (it was the third best-selling children’s book in the UK in 2023), but it is a major contributor to Bloomsbury’s continued growth. Revenues from all the Harry Potter books, spin-offs and illustrated versions rose 7% last year.
But landing the biggest book franchise of the 21st century didn’t make Newton or his team at Bloomsbury sit back and bask in their success. Throughout the early 2000s the company reinvested the phenomenal profits from Potter and other popular titles into an acquisition spree. Buying in complimentary specialist publishers to expand the scope of the company’s operations. By 2005, revenues had risen to more than £100m. That year, the sixth instalment of Harry Potter (The Half Blood Prince - the one that Rowling had teased would culminate in a major character death… no spoilers here) sold more than 2 million copies within its first 24 hours of publication.
But the strength of Harry Potter caused problems for Bloomsbury in 2006 - a year without a new hardback publication. Revenues that year fell 31% globally and 42% in the UK. Profits spiralled downwards, taking the company’s previously high-performing share price with it. Management pointed to a weaker pre-Christmas trading period and a failure to complete the payment of reference rights before the year end as a reason for the decimation of profits (which also led to the company’s first operating cash outflow for many years). Compounded by the effects of the financial crisis, Bloomsbury’s share price continued to creep downwards and hit a low of 85p in 2011.
A ten-year multi-bagger
Any investor who bought at the low is sitting on an exceptionally strongly performing stock. As Paul pointed out this week following the publication of another earnings beat, Bloomsbury has been “a four-bagger in the last 10 years, and a two-bagger since the Covid lows in 2020, with dividends on top too, as well as self-funded growth.”
Bloomsbury exhibits many of the traits that Ed has recently been hunting for in multi-baggers (subscribers can watch his full series of masterclasses on the subject here). The company’s operations throw off cash which has been reinvested in expansion (often by acquisition) and led to a consistent, reliable revenue growth performance. Sales have risen at a compound annual rate of 10% over the last five years. The company has a strong track record for beating its own and analysts earnings forecasts (just this week, management released a trading statement that revealed revenue and profits were materially ahead of expectations) and as such, broker upgrades provide regular stimulus to the share price. And Bloomsbury is founder-led - Nigel Newton started the business in 1986 and remains its chief executive.
But the company is also an example of a multi-bagger that was hard to spot. It doesn’t claim to be doing anything especially ground-breaking and its protective moat lies in the expertise of its staff and its reputation in the book publishing industry, which helps it attract exceptional writers (not a phenomenally high barrier to entry). Its intellectual property is not owned, but the property of the authors who write the books. And while the company does benefit from strong IP in its stable (when talking about the upcoming Harry Potter series being made by Amazon Prime, Newton commented, “as with other high-profile Harry Potter productions, we believe that the series will stimulate further interest in the Harry Potter books.”) it is reliant on those authors and their agents to make the most out of their brands.
Bloomsbury’s margins and return on capital also exclude it from screens we have used to help identify multi-baggers. In our research we’ve seen operating margins and ROCE at more than 15% in multi-baggers in the making, but Bloomsbury’s have both averaged less than 10% in the last five years.
But Bloomsbury has been a firm favourite among private investors for many years and one of the reasons for that popularity is a non-prohibitive valuation. Despite such quality and the consistency of growth, the price to earnings ratio has rarely crept higher than 15 times. Currently trading at 14 times historic earnings - a valuation which doesn’t take into the fact that the company is currently trading “materially ahead” of expectations - there still looks room for further share price growth.
Newton recently praised the fact that the company’s expansion into academia has helped smooth out the annual revenue, which previously relied on Christmas sales. At the half year mark, Bloomsbury celebrated four straight quarters of revenue growth - a landmark Newton has been striving towards since he founded the business 37 years ago.