* All data are as of the close of Wednesday, December 3, 2014. Emphasis is on company fundamentals and financial data rather than commentary.
If you thought the digital age has run old fashioned book publishers out of business, think again. While it is true that e-books are all the rage with the average consumer, you still have a large portion of the economy that relies on physical text books, manuals and guides, along with all the research and consulting that goes into producing them.
The three largest U.S. companies in the Book Publishing industry are at the forefront of a still growing book publishing industry, as their earnings forecasts attest to. But let's first recap what each of the three offers to note how each is diversifying in the rapidly changing publishing business.
• John Wiley & Sons Inc. (NYSE: JW.A), headquartered in Hoboken, New Jersey, provides knowledge and knowledge-enabled services in research, professional practice and education, offering scientific, technical, medical, and scholarly research journals, books, reference works, databases, clinical decision support tools, laboratory manuals, and workflow tools in the fields of physical sciences and engineering, health sciences, social science and humanities, and life sciences. Its client-base includes corporations, governments, public libraries, researchers, scientists, clinicians, engineers, technologists, scholarly and professional societies, students and professors, bookstores, and online booksellers. It also publishes print and digital books, test preparation, assessments, online learning services, and certification and training services for business, finance, accounting, workplace learning, management, leadership, technology, behavioral health, engineering/architecture, and education communities.
• Scholastic Corporation (NASDAQ: SCHL), headquartered in New York, New York, publishes and distributes children's books, media and interactive products through school-based book clubs, book fairs, and the trade channel, along with curriculum-based learning technology and materials for grades pre-kindergarten to 12, as well as related implementation, assessment and school consulting services. Its published products include classroom magazines, supplemental classroom materials, custom curriculum and teaching guides, print and online reference products, and non-fiction products for schools and libraries. It also has branched into programming and digital content for multiple platforms including television, DVDs, audio, movies, interactive games, computer applications, and websites. It also produces a television library consisting of half-hour productions for schools, libraries, and retail markets, as well as creating audio visual adaptations of classic children's picture books.
• Courier Corporation (NASDAQ: CRRC), headquartered in North Chelmsford, Massachusetts, produces hard and soft-cover books, manages content, and provides warehousing and distribution services for publishers, religious organizations, and other information providers. It also provides cloud-based content management technologies for publishers and other companies interested in providing a self-publishing platform to their customers or communities. It publishes books in approximately 10,000 titles in 30 specialty categories, including fine and commercial arts, children's books, crafts, music scores, graphic design, mathematics, physics and other areas of science, puzzles, games, social science, stationery items, and classics of literature for children and adults. It also publishes approximately 600 test preparation and study guide titles for teachers and students.
Let's not forget, you have some very creative people working in publishing. They'll find a way of staying relevant as the world changes around them, as the above three companies have proven.
Even so, two of the three have had a hard time keeping up with the broader market over the years since the economic recovery began, with only one of them outperforming it. Yet even it has been trending sideways along with its peers lately, as graphed below.
Since the economic recovery began in March of 2009, where the broader market S&P 500 index (black) has gained 205%, the second of the three largest U.S. companies in the Book Publishing industry, Scholastic (blue) has managed impressive gains of 255%. Yet its peers Wiley (beige) and Courier (purple) have struggled to hold on to their 110% and 50% respective gains.
On an annualized basis, where the S&P has averaged 36.18%, Scholastic has averaged a scholarly 45% per year, while Wiley and Courier have averaged a barely passable 19.41% and 8.82%. While these would be great returns in any normal period, these last 5.5 years since the recovery began have not been a normal period, with better returns being published elsewhere.
Looking forward, however, the Book Publishing industry looks set to write a whole new chapter for itself as it outgrows the broader market as tabled below, where green indicates outperformance while yellow denotes underperformance.
Over the immediate term, the industry's earnings are expected to outgrow the broader market's average growth rate at some 3.83 times, before settling down to a more sustainable 2.79 times in 2015 and 1.75 times annually over the next five years.
Zooming in a little closer, the three largest U.S. companies in the space are expected to grow as fat as a bookworm in a library, as tabled below.
While all three are expected to stagnate just a little more this quarter, all are destined to show vast improvements, with Wiley the most sluggish and Courier the most robust.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, Wiley posted the greatest revenue growth year-over-year, while Courier printed the slowest, even shrinkage.
Since Scholastic's earnings growth is not available, the metric does not factor into the comparison, though it is worthy to note that Wiley blotched its earnings.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, Wiley operated with the widest profit and operating margins, while Scholastic contended with the narrowest.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, Wiley's management team delivered the greatest returns on assets and equity, where Scholastic's team delivered the least.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, Courier provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while Scholastic's DEPS over current stock price is lowest.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, Courier's stock is cheapest relative to forward earnings and company book value, while Wiley's is the most overpriced.
Since Courier's price to 5-year PEG is not available, the metric does not factor in the comparison.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, Scholastic offers the highest percentage of earnings over current stock price for the current quarter, Wiley offers it for the next quarter, while Courier offers it for 2015. At the low end of the scale, Wiley offers the lowest percentages overall.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, Courier delivers the greatest growth in all available time periods, while Wiley offers the slowest growth.
Since Courier's 5-year EPS growth rate is not available, the metric does not factor into the comparison.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
Since Scholastic's analyst price targets are not available, none of the metrics factor into the comparison.
What's more, since each of the remaining companies has only one analyst making price predictions, even those readings lack perspective and would best be omitted anyway.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, Courier is best recommended with one strong buy and 0 buy representing a combined 100% of its sole analyst, followed by Wiley and Scholastic in a tie with 0 strong buy and 1 buy rating representing 50% of their 2 analysts each.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… Courier with a textbook finish, outperforming in 14 metrics and underperforming in 2 for a net score of +12, followed far behind by Wiley, outperforming in 9 metrics and underperforming in 14 for a net score of -5, with Scholastic coming unbound, outperforming in 3 metrics and underperforming in 10 for a net score of -7.
Where the Book Publishing industry is expected to outperform the S&P broader market substantially next quarter, and significantly in 2015 and beyond, the three largest U.S. companies in the space are expected to continue stagnating over the immediate term, before finally breaking out to outgrow the broader market's average earnings growth from slightly to substantially.
After taking all company fundamentals into account, Courier Corporation binds together the most complete library of financials, given its lowest stock price to forward earnings and company book, highest current ratio, highest revenue and EBITDA over market cap, highest diluted earnings over current stock price, highest future earning over current stock price for the longer term, highest future earnings growth in all available time periods, highest dividend, and most analyst strong buy recommendations - decisively winning the Book Publishing industry competition.