More on Reed Elsevier
Reed Elsevier: 2005 results
Reed Elsevier hit its growth targets (5% organic revenue growth and double digit organic EPS growth) in 2005 and has confirmed that it is aiming for the same level of growth this year. It has to be pointed out that, in the case of profits, it was at the bottom end of the (rather vague) target range with EPS growth of 11%.
Reed is well run and is undoubtedly delivering what it has promised. Its biggest weakness, in our view, are long term competitive threats to is its academic publisher, Elsevier, which generates 39% of operating profit. Like others in the field Elsevier has long benefited from high margins that are the result of high barriers to entry. We continue believe that this is likely to change.
There are already signs that it is changing. Although Elsevier’s sales have continued to grow, its operating margins have shrunk this year, falling from 33% to 31%, a significant decline. We have previously discussed support for “open access” (Free distribution of scientific research) journals from the funders of scientific research. Support for open access seems to be growing and we suspect many governments are (or will) take the same view as the House of Commons Select Committee.
Even if open access journals do not displace traditional journals, they are likely to take market share and reduce margins drastically. This leaves 39% of Reed Elsevier’s operating profits facing a severe threat that the company can do little about.
Both Lexis Nexis (legal publishing, 30% of operating profit) and Reed Business (19% of operating profit) continued both strong sales growth (+8% and +13% respectively) and margin improvement. The drivers are a little different as Reed Business is more cyclical, but both are performing extremely well.
Textbook publisher, Harcourt Education (14% of operating profit), did rather worse, with Sales up 3% and operating profit up 2%. The core text book publishing activities performed well, but businesses such as testing were weaker.
At 530p Reed Elsevier is trading on a prospective PE of 16× and should yield 2.8%. This is good for the current growth but given our concerns about the long term outlook for Elsevier we are inclined to be cautious.
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