Book publishing is a stable if not glitzy industry worth a serious look by small investors.
Publishers target trade sales, consumers, education, and virtually every segment of society through traditional books, e-commerce, audio, digital platforms, etc. Every human being is a potential customer.
Here are three companies with potential for steady growth and stable stock prices offering good dividend yields.
I have written several articles for Seeking Alpha suggesting small investors focus on non-cyclical industries. Amidst dire warnings about a market bubble potentially collapsing by 20% or more, investors ought to seek companies weathering economic fluctuations. A third industry I like (in addition to paint and alcohol manufacturers) is traditional book publishing.
Book Sales: From U.S. Census Bureau
There are enough people reading and buying books to make certain stocks worth considering. Winter doldrums and summer vacations are best sales times through retailers. Annual sales peaked a decade ago at almost $17b. They have been holding steady at about $14b for the past few years. Another $15b of books is sold through other outlets generating annual revenue at $29b, according to Book Publishing Market Research Report (July 2014).
The report predicts a growth trend for the next five years because of "improving consumer sentiment, rising college enrollment and a new nationwide K-12 standard." Barriers facing new publishers "include the cost of recruiting authors; purchasing paper and printers; developing distribution channel and marketing… revenue is never guaranteed and costs recur for each book published." The major publishers are constantly cutting production costs, dominating shelf-space, and expanding through acquisitions.
According to the Association of American Publishers, "Trade publishing (general-interest fiction and non-fiction for adults, children and young adults and religion) experienced significant growth since 2011." E-books account for 20% of the trade market, and audio books are strong. Total revenue in 2012 from non-U.S. market grew by 7.2%. Print sales abroad were to the U.K., Germany, Australia, South Korea, Philippines, and Singapore. Consistent increases in print revenue are from sales to France, Colombia, and the U.A.E. Here are three major publishers to consider.
Pearson PLC (NYSE:PSO) is the largest book publisher and education company in the world with 60% of its revenues generated in North America. Name brands include Penguin and Random House. PSO is sectoring into Penguin Random House with revenues expected to be $3.9b; Pearson Company focusing on school, higher education, and professional arenas; and Pearson Professional includes The Financial Times. PSO is a big player in broadcasting and other commercial media. For the past year, the stock is in the $18.50 to $19.60 range hitting a high of $22.40. Sales approach $5b, income $773m, with sales and income both positive. The attractive dividend yield will likely maintain a healthy 4.4%.
On a smaller scale are two specialty publishers. Educational Development Corp. (NASDAQ:EDUC) is trading close to its 52-week high of $5 per share, and offers a dividend yield of 6.6%. Sales exceed $27m, but the net profit margin barely hits 2%. Sales are up 3.6%, but income growth is a negative. Fidelity Low-Priced Stock Fund is the largest mutual fund stockholder, with a holding of almost ten percent.
EDUC publishes educational children's books and related materials. It sells through home sales commissioned representatives, bookstores, museums, schools and public libraries. In August, EDUC reported sales increased for the first quarter by 20%, earnings per share were six cents compared to two cents in the previous year, and earnings before income taxes tripled. Reference books are one of EDUC's strengths, including encyclopedias and dictionaries of science and archaeology for youngsters.
One popular analyst rates the stock a hold despite EDUC's strong revenue growth and cash flow from operations. It has a "largely solid financial position with reasonable debt levels by most measures." Yet, EDUC faces "feeble growth in the company's earnings per share and deteriorating net income."
We believe the stock price has slow but steady upside potential. Management is moving in the right direction vis-à-vis the Internet, and keeping the lid on debt. If sales continue increasing generating good cash flow, and shareholders continue receiving a reasonable dividend yield, EDUC will be a good long-term investment and perhaps a takeover target.
Scholastic Corporation (NASDAQ:SCHL) also publishes educational materials and books. SCHL publishes and distributes through school book clubs and fairs, e-commerce, and trade sales. When I was a grade-schooler in the 1950s we looked forward to reading Scholastic's My Weekly Reader with as much anticipation as our parents read Time Magazine. The company today is heavily into the digital age with a Media, Licensing and Advertising segment creating and producing educational programming for various platforms. SCHL has a television library with hundreds of hours of productions for schools and retail markets. Their education segment rose ten points in the past decade to more than 26% of sales in 2014.
SCHL sells close to its 52-week high of near $37 per share. There is a lot of good news, announcing its fiscal fourth-quarter profit rose 31%, and revenue increases in four of fiver operating segments. Its core book business experienced a 15% increase in sales compared to a year before. SCHL capstones are the "Harry Potter" and "The Hunger Games" series. The quarter ended May 31st, posting a $28m profit compared to $21.5m a year earlier. Earnings per share increased 43%. Most impressively, education tech sales grew 9% with innovation math programs hitting the market. It comes at a time when government and institutions are once again investing in math and science programs.
Not everyone envisions a bright future for SCHL. David Hernandez of DH Analytics wrote in Seeking Alpha last month, the company needs a growth driver after years of revenue decline over the last decade. Hernandez believes local, state and federal spending for education will remain flat, with their budgets beset by limited tax revenue growth. He does not hold out hope for more dollars being spent on education core curricula.
I disagree. I believe we are on the cusp of a new wave of dedication to education and spending, especially in math and science. U.S. high school students just placed tenth among nations in the International Physics Olympiad, well behind number one, China, and this is unacceptable. Skilled jobs go begging for qualified employees throughout industries and across the nation. Technology is master to future economic growth, and education is the key.
Once U.S. leaders refocus on domestic issues expect a re-dedication to math and science much like the post Sputnik era. SCHL, with cutting edge publications and delivery systems, will benefit. The addition of Donalyn Miller to SCHL adds gravitas to SCHL persona as an advocate and developer for better and more innovative learning materials.
Mergers and acquisitions dominate the book publishing industry. The big six publishing houses are now five with the merger of Penguin and Random House. If enough synergies exist between EDUC and SCHL, perhaps we will see a new powerhouse company formed.
Leaders talk about the importance of education in shaping the future society. Public-private partnerships will be more entwined. Publishers with enough foresight to publish the children's books of (Scholastic) Shel Silverstein, and Dr. Seuss (Random House) are investments not to be given short shrift. The bedrock of modern education remains, "The more you read, the more things you will know. The more that you learn, the more places you'll go."
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