Last week I looked at the mainly non-fiction and illustrated publisher, Quarto (see also here). This week, Quercus Publishing (OFEX:QUPP) caught my eye in a screener mostly based around looking for companies which exhibit both high medium-run returns on capital with a low price to tangible book value. Both of those screening metrics are blunt instruments for a delicate craft, but the list often throws up a few companies worthy of interest, and Quercus was one of them. Quercus is a publisher too, but not exactly in the same vein as Quarto - Quercus do the more blockbuster stuff mostly, with their healthy dose of fiction. Apologies in advance if I get my Qs confused.
Anyway, in this particular case the way I went about my screening is extremely relevant, because it quickly becomes apparent why Quercus meet those two (apparently contradictory) characteristics. Why would a company that has shown it can earn supernormal returns on its capital trade at less than the value of that capital, or a proxy thereof? There's one obvious answer - something has materially changed. In Quercus's case this became clear to me rather amusingly. From their preliminary results:
• Revenues from non-Larsson titles increased 18% on a like-for-like basis • Q1 2013 non-Larsson sales in the UK (based on Nielsen Bookscan top 5000 titles) increased 134% over Q1 2012
'Non-Larsson' sales as a metric! Not very often you come across companies that have to come up with a phrase like that, but it's crucial for Quercus. They were the publishers of Stieg Larsson's 'Millennium' series of books, which included The Girl with the Dragon Tattoo, later made into a film. There's a nice article about that particular story here, which is well worth a read - particularly because of the way it deals with the issues involved. It is, as journalism will always be, a people focused piece. People make stories interesting. I'm sceptical to give too much weight to a company having one big bestseller, though; while the more optimistic might suggest that this means the company has particularly great people onboard (it might have) or has a new and winning business strategy (again, a possibility), the whims of fate are, by nature, random. Much like the music industry, you can throw…
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