Stock in Focus: Can Bloomsbury Publishing print a digital future?

The catastrophic collapse in DX Group shares following a profit warning last week has been blamed on heavy-handed institutional selling. However, a 70% fall in one day is exceptional for a profitable company with no apparent financial problems.

I suspect that the underlying cause of the sell-off may have been investors’ sudden fear of being trapped by a business in structural decline. Sellers were determined to get out at any price.

The result arguably leaves some value on the table at DX, but that’s a topic for another day. In this post, I’m going to look at another firm with a high StockRank which could also be in a structural decline. Could shareholders of publisher Bloomsbury one day find themselves on the sharp end of a 50% loss?

The pace of change

Microsoft founder Bill Gates made a good case for suggesting books will become obsolete and that investors shouldn’t allow themselves to be lulled into a false sense of security:

“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction.”

Yet it’s not black and white. Bloomsbury may still be cashing in on paper copies of the latest Harry Potter special editions, but there’s more to the firm than that.

As a commenter explained in response to Paul Scott’s comments on the firm in July, Bloomsbury also has a thriving and well-regarded professional and academic publishing service. Much of this is digital. Such activities generated a third of revenue and 42% of operating profit last year, up from 32% the previous year:

Bloomsbury seems to be doing a reasonable job of developing electronic products and services to replace its paper editions, in both its fiction and reference divisions. The key thing, from my perspective, is that the firm recognises the need to change. Complacency is lethal, as Bill Gates understood:

“In this business, by the time you realize you’re in trouble, it’s too late to save yourself. Unless you’re running scared all the time, you’re gone.”

Is it good value?

Let’s start with the basics. Is Bloomsbury cheap? A StockRank of 96 and a ValueRank of 76 are encouraging.

Bloomsbury also qualifies for six Guru Screens. These include three value investing screens (Dreman Low P/B, Dreman Low P/E and John Templeton Bargain) and two income screens. All five of these have beaten the FTSE 100 by at least 11% over the last two years. The Dreman Low P/E screen has managed a 35% gain over this period, versus an 8.3% loss for the FTSE 100.

Focusing on the numbers, Bloomsbury looks quite reasonably valued, if not cheap:

A trailing yield of 3.75% and price/book of 0.99 seem attractive. On the other hand, a price/free cash flow ratio of 25 is a little pricey. Bloomsbury’s earnings yield (Op. profit/EV) of 7.8% isn’t amazing either.

However, looking back at the Stockopedia figures for the last 6.5 years, Bloomsbury’s free cash flow does seem pretty consistent. In aggregate, it has covered 97% of the firm’s dividend payments since 2010.

What’s less clear is how robust Bloomsbury’s book value would be if it was forced to sell some or all of its assets. The value of intellectual property with a tapering commercial shelf life can be hard to judge. A long run of consistent valuations reassures me somewhat, but there is room for uncertainty, in my view.

Falling Quality?

The helpful arrowhead indicators by Bloomsbury’s StockRank tell me that its QualityRank has been falling recently.

Hovering over the red arrow shows that the QualityRank has fallen by 10 over the last 30 days, to its current value of 71.

The trigger for this fall was presumably Bloomsbury’s latest interim results, which were published on 27 October. Why might this be?

A useful feature in Stockopedia is the ability to view historical StockReports. To do this, click on the arrowhead by the print button at the top of each StockReport and choose the date you’d like to view.

Looking back at the snapshot for 7 October shows me that Bloomsbury’s Piotroski F-Score has fallen from 7 to 6 following the publication of the recent results. The F-Score is heavily weighted in the QualityRank algorithm. It includes nine important measures of financial strength and profitability. A good score here covers a lot of important investing criteria, in my view.

It’s not possible to see which element of the F-Score has changed since October 7, but it’s worth noting that the three red flags in the current F-Score are all pretty marginal. They represent tiny declines in cash generation, the current ratio and gross margin on the prior period. In my view these differences are too small to be concerned about. For example, a current ratio of 2.66 instead of 2.74. Both are very healthy figures, so I’m not worried.

While I’d accept Bloomsbury’s 8% operating margin as being reasonable for a publisher, the firm’s return on capital employed has averaged 6.8% since 2010. That’s probably less than the Bloomsbury’s cost of capital, at a guess.

Similarly, while Bloomsbury has had a net cash balance since at least 2010, it has declined steadily. In 2010, net cash was £35m. Today, it’s less than £1m. Cash has been used for acquisitions, but any fresh use of debt might be worth watching. Returns aren’t high enough to justify getting geared up, in my view.

Is there momentum?

Bloomsbury shares hit a 52-week high of 185p in June. They’ve languished since then and are only worth 3% more than they were at the start of the year.

However, Bloomsbury does have a MomentumRank of 92. What’s driving this?

One factor is that the shares have only pulled back by 11% from their 52-week high. The 50-day moving average (dMA) is more than double the 200 dMA.

On the earnings front, EPS forecasts for next year have edged higher recently. Even better was that the recent interim results came in 12% above expectations, according to Stockopedia figures.

In fact, earnings forecasts have been edging higher all year:

Where now for Bloomsbury?

I agree with Paul Scott’s view that Bloomsbury isn’t cheap enough to be an obvious buy. Yet the firm’s performance over the last six years has been more than acceptable. Sales have grown at an average of 5% per year. Operating profit has risen by an average of 9.4% each year, while dividend growth has averaged 6.6%.

Bloomsbury’s sales are always weighted to the second half, thanks to the start of the academic year and then Christmas. I like the fact that this firm serves a mixture of markets, in both digital and paper formats.

In my opinion, this boring stock may yet be able to make further progress. Please DYOR as always, and share your views below.