Bloomsbury Publishing – First Thoughts

Bloombsbury Publishing is best known for the immense success it has enjoyed through publishing the famous Harry Potter series. The novels absolutely transformed the image and profitability of the company through the late 90s and the start of the new millennium and have been the source of much of its growth since. While easily dismissible as a participant in what is considered a dying industry, Bloomsbury have actually shown remarkably consistent earnings power recently and this qualifies it for a closer look. Peter Lynch identified successful or growing companies within mature or declining industries as potential investments due to their tendency to be overlooked and therefore undervalued. Is this the case with Bloomsbury?

Screen Summary

• A PE ratio of 11.4x and PS of 1.1x seem modest and suggest that the firm may be undervalued relative to its earnings.
• A PCF ratio of 19.0x seems more expensive, although the acquisition driven strategy is always likely to lead to free cash flow below operating cash flow and profits.
• A PB ratio of 0.99x also appears to undervalue the company although the ratio is potentially understated due to the composition of assets as discussed below.
• An ROC of 7.49% is modest although the metric is relatively consistent in recent years and has the chance to improve as the business’ focus shifts to higher margin products.
• Operating margin, at 8.69% is good for the sector although not high in absolute terms.
• Finally, a dividend yield of 4.0% is highly appealing and seems to have grown steadily over the past 6 years.

Company Background

Bloomsbury was founded in 1986 with the goal of bringing high quality publishing to the mass market and floated not too long afterwards in 1994.  Since then, the company has expanded significantly through the acquisition of predominantly niche brands in addition to some organic growth.

The company’s operations fall into four broad divisions as follows: adult; children’s and educational; academic and professional; and information.  Traditionally, the business focused on the publication of excellent works of fiction and non-fiction, with the intention  to build up a portfolio of high quality names and titles.  This strategy was successful, with the group now publishing a range of well-established writers alongside talented newcomers.

Now, however, the group focuses ever further on academic and digital publishing, citing consistency of revenue and longer term sustainability of earnings potential as key motivations.

The Strategy

As the group expands, they aim to focus on academic and professional revenues due to the higher margins and superior consistency of earnings.  Further, the company appears to be well aware of the ever present progression towards an increasingly digital market and significant sales now come from eBooks, other digital publications and database licensing fees.

The group’s activities within the academic and professional sector are widespread and now represent a significant part of revenue.  Further growth is being pursued through the acquisition of niche brands within the sector where profitable opportunities exist.

An excellent demonstration of the strategy is seen with the recent acquisition of Osprey Publishing.  Osprey is an Oxford based military and natural history publisher that was acquired for a total consideration of £4.6m and had an immediate positive effect on earnings.  While Osprey itself is unlikely to grow, it is profitable and serves the interests of a certain group of consumers who are highly likely to continue demanding the company’s publications for many years to come.

This appears to make sense as a strategy – the acquisition of stable and profitable brands will throw off cash which can be used to make further acquisitions of similar description in order to provide slow but steady growth for, potentially, many years to come.

Regarding adult and children’s publications, the strategy is different as would be expected.  The intention here is described well by the CEO Nigel Newton in this interview with Edison.  In short, he describes the strategy as similar to that of an asset manager – Bloomsbury aim to acquire a portfolio of high quality and original works with a few highly successful publications being the source of the majority of profits.  This has certainly been the case and is demonstrated best of all by the success of the Harry Potter series.  While Harry Potter can be expected to generate some profits for years to come, it is a mature series and will not be the source of further growth.  Though the success of the series is unlikely to be matched again, it shows that the strategy only requires a few great publications a decade to generate good returns.

The Market

The paper publishing industry is famously in decline and I am naturally wary of investing for this reason.  However, while paper publishing has certainly seen its heyday, people’s consumption of reading material has not.  What has really changed is the way in which people consume their reading material, with the obvious trend being towards digital mediums.

Therefore, I don’t see the industry as declining in the way that the camera film industry has over the past 10 years.  Rather, I see it as comparable to the photography industry, which is thriving as well as ever, simply through an updated digital medium.

I think it makes sense that some companies may be able to transition smoothly from the paper publishing age to the digital publishing age and that there are highly likely to be some success stories.  Whether Bloomsbury can be one of these success stories is another matter, although I am inclined to think that the company has made good strategic choices to date and that the academic publishing business will be less severely affected by this transition.

Financial Statements

Over the past 6 years, the company has seen modest but very consistent revenue growth.  Further, growth in revenue has been matched by superior growth in operating profits, suggesting that the business has kept excellent control of its costs throughout this period.  Dividends have also grown steadily and the stock currently yields about 4%.

While not particularly exciting, the stability is highly appealing here, especially as this was one of managements stated goals.  A look at accounts from 2005 to 2010 reveals that revenue was far more variable and I like that management’s claims of the stabilising effect that academic publishing would bring appears to have been substantiated by recent performance.  Academic and professional publishing now make up 32% of group revenue and are growing still.  The trend of more consistent earnings therefore seems relatively likely to continue as a result.

Cash flow, while broadly confirming reported profits, has been a bit less consistent especially when looking at free cash flow figures.  This does not surprise me given the acquisition led growth strategy, however, and this inconsistency is likely to continue as the company expands going forwards.  That said, cash itself does not appear to be an issue currently and the business is cash generative with about £10m currently sat on the balance sheet.  Cash position aside, the balance sheet appears strong with only £7.2m in the way of long term creditors of which £2.5m is long term debt and £3.1m is a deferred tax liability.

While book value is quite high relative to the market capitalisation, the majority of the balance is made up of receivables, inventory, prepayments, goodwill and intangibles, the values of which are always subject to circumstance.  Inventory held at cost may always be written down, for example, should a particular author or series perform poorly.

Regarding current assets, all of these points seem to be disclosed clearly and fully in the accounts (see notes 15 and 16 for inventories and receivables), and there is no obvious reason to suspect the provisions described are unreasonable.

Goodwill and intangibles are slightly harder to deal with, of course.  Significant goodwill is expected given the acquisition strategy and represents the largest number on the asset side of the balance sheet.  Goodwill is simply the excess over book value that the company has paid for acquisitions and its value is therefore inextricably linked to the value of the businesses it relates to.  If management overpaid for acquisitions, it is entirely possibly that goodwill figures are overstated even at historical cost.  It is also possible, of course, that the figure is understated if the intrinsic value of the acquisitions is beyond the consideration paid.  While not amortised, these investments are reviewed annually for impairment and disclosure surrounding the assumptions used in this process appears clear and conservative.

Other intangible assets include publishing rights, trademarks, imprints, relationships, systems development, product development and assets under construction.  This is also a significant figure on the balance sheet with the majority of it (about half) being sat in publishing rights.  As with goodwill, the value of these items is subjective and extremely difficult to gauge and so I think that this should be born in mind if considering an investment thesis based on the small discount to book value.

Concluding Thoughts

Overall, I quite like the business and am impressed by the vision and credentials of the management team.  Revenue seems to have stabilised into a steady growth state currently and the strategy of increasing academic and digital sales seems likely to reinforce this.  Further, cost management has been effective with operating profits improving beyond revenue growth over the past 6 years.

It must not be forgotten that Bloomsbury operate in a difficult industry that has already undergone big changes in recent years.  It seems probable that the industry will continue to develop as it has done and the company will therefore have to be adaptive if they are to survive, let alone grow.  That said, Bloomsbury have demonstrated that they are capable of evolving so far and their explanation of how they will meet this challenge seems to make sense.

Finally, attention must be brought to the valuation of a number of items on the balance sheet.  There are a lot of big numbers in there that depend heavily on management’s judgements and assumptions and therefore should not simply be taken at face value.  In the event of a liquidation, for example, it is likely that much of the asset value in the form of inventories, goodwill and intangibles would evaporate.  An investment case can certainly still be made, however, and I will be looking into the company further before reaching a decision either way.

Hope you enjoyed the article, if so then please share it with your network and feel free to leave any comments or questions below – I am always particularly interested to hear opposing points of view!

At the time of writing I do not hold a position in Bloomsbury Publishing – LON:BMY

It is important to note that all opinions expressed in this piece are the opinion of the author only and do not, in any way, constitute investment advice.  Any individual seeking to make investments of any kind should conduct thorough proprietary research so as to fully understand the risks they are taking.

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