Publishing Business: Gradual Rise Or Slow Demise?

Includes: JW.A, PSO, SCHL, SPGI
by: Mihir Mehta

If you were to ask a first-time investor on the Wall Street about the stock he would want to start his investing career with, I am kind of sure his answer would be a stock belonging to either Tech or the Retail industry.

This is not surprising because these sectors have long provided investors with safe harbors for earning a reasonable rate of return. However, prudent investors always watch out for other industries that can give those gains at tolerable risk. One industry that does not show up much on the radars of investors and analysts is Education. As for this article, I would focus my opinions on the stocks that are in the publishing industry and whether they deserve your attention.

Knowing about the industry

Much like the retail industry, the publishing industry has become fiercely competitive due to the entry of e-book readers and resultant digitization of books. Amazon's Kindle and Barnes and Noble's Nook reader are among the customer favorites that are giving the traditional book publishers a run for their money. In addition to presence of convenient e-book readers, a unique characteristic of this industry lies in the presence of small and local publishers who come out with cheaper versions of similar content. However, this competition can be mitigated by using adequate entry barriers like copyrights.

Not so encouraging facts

The sale of the McGraw-Hill education business by McGraw-Hill companies (MHP) to investment funds affiliated with Apollo Global Management seems a move to gradually phase out from core publishing. As per news available on the company's website, management is thinking on the lines of renaming the new company as McGraw-Hill Financial, subject to shareholder approval. Such a strategic sale by one of the biggest entities can be a sign of caution for the investors.

The publishing industry landscape has undergone major change since the advent of e-books and competition from other media. As a result of this, the future of traditional publishers is looking less promising. In order to sustain in such a dynamic and evolving marketplace, these publishers need to take concrete steps toward innovation.

What makes this industry?

One of the biggest players in the publishing industry is John Wiley & Sons (JW.A), which has a market cap of approximately $2.27 billion. Wiley is one of the early adopters of an evolving marketplace, embracing digitization and the mobile lifestyle of its customers. Most of Wiley's titles are available as e-book downloads and on top of that it also offers bookshelf software that is convenient and wonderful to use. Even though net income was down for the first quarter by approximately 9.2 percent, the company generated an impressive amount of cash flow. In my opinion, Wiley has a promising year ahead as it gears up to meet its customer with a new line up of interesting titles.

If I have repeatedly heard a name while growing up that belongs to this industry, then it is definitely Pearson Plc (PSO). The company is credited with bringing about a revolution in the education industry, benefiting students across the globe. As for the financials of the company, I would call it satisfactory and not something over the top. The reason why I call it satisfactory is because the company successfully increased its revenue by 4% in 2012 and declared EPS of 84.2 pence in spite of a highly challenging business environment. The outlook for 2013 is modest and estimates for various parameters have been given at margins similar to 2012. My point of confidence in this company lies in its strategy of transformation from print to digital media as well as coming out with innovations like 'MyLab' digital learning in order to adapt to the changing landscape. Such tweaks in business model are sure to churn out benefits in the long run.

This piece of news on Scholastic (SCHL) is enough to understand the magnanimous efforts being made by the company to achieve integration of digital media for higher student engagement. However, I am not really pleased to see its financials, especially for the fiscal 2013 third quarter. The loss per share from continuing operations almost doubled in Q3 at $0.63 per share, owing to lower than expected sales of "The Hunger Games" trilogy. In my opinion, the revenues of Scholastic do not adequately justify its current price, which is in the range of $25-27 and if revenues stay on similar lines, a market correction can bring down its price.

The last words

Takeaway points on this industry:

  • Increasing competition for traditional publishers
  • Publishers following the same path, i.e content digitization
  • Consistent innovation on product front

In my opinion, investing in this industry at this point of time can turn out to be risky and would not provide rewards that justify such risk.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.