John Wiley (JW.A): Mini Monopolies in Academia

In my quest for businesses with monopoly features, I came across this company that has mini monopolies scattered throughout the academic sphere.

I am talking about John Wiley (JW.A) and its academic journals business. The company publishes journals in the physical sciences, health sciences, life sciences, and humanities. It owns some of the titles outright, others – jointly with professional organizations, and still others – not at all. The latter are just published by John Wiley under long-term contracts, but are otherwise owned by the respective professional societies.

What is most notable about all these journals is that they are among the top most quoted among their peers. Citations to academia are what links are to Google’s PageRank. The more respectable and numerous research quotes you, the more clout, and accompanying benefits, you get. You can see why academic journals benefit from a huge network effect. The more top scientists publish in a journal, the more valuable it becomes to researchers. The readership goes up and more scientists want to be published in the journal. Eventually, academic/institutional libraries have no choice but to keep renewing their subscriptions. Competition is suppressed, because each journal is covering a small niche and a new journal would be starved long before it can gather enough momentum to stay in the game. There is little incentive, besides price, for subscribers to switch to the new offering. Basically, they will have to pay for both subscriptions while the new-entrant can fully substitute for the established publication and this goes against the price motive.

The defining characteristics of the winner-takes-all business are:

  • High profitability
  • Low competition

What’s there not to like?

The problem, as with other monopolies I have been looking at (see OPAP), is that growth has been exhausted.

John Wiley Revenue Income Cash Flow 2003-2016As the chart shows, the business has been going sideways for the past decade:

  • revenues ~ $1,750 million
  • operating income ~ $230 million
  • net income ~ $160 million
  • Free cash flows ~ $300 million

Zooming into the segment performance reinforces this conclusion.

John Wiley Revenue by Segment 2010-2015There is no point going further back as restructuring is making the comparison more difficult. But, as you can see, the situation is the same:

  • Research ~ $1,000 million
  • Professional development ~ $410 million
  • Education ~ $300 million

The subscription business is solid and growing at 1% annually.

The print books business is shrinking, but it is being counterbalanced by digital books and online test prep, certification, assessment, and training services. This segment is declining at approximately 1% annually due to the difficulties the print business is facing (declined 7% in the six months ended October 2015). However, John Wiley has very strong offerings in digital content and test prep. Last year it acquired, which provides preparation for the CFA Program.

I see great growth potential in the Online Test Preparation and Certification subsegment as more and more people pursue continuing education and opt out of the monstrously costly fulltime education and instead go the certification way.

As of now, digital books, test prep, and other knowledge services within the Professional Development segment are only 50% the size of print books. Undoubtedly, the decline in print books will weigh on the segment, but as I noted, I can see print being superseded by digital and test prep without shrinking the segment or potentially even expanding it.

Тhe education segment is the company’s growth engine. It is the smallest of the three segments, but it has grown by one-third in the past 5 years and is now almost the size of the Professional Development segment. It has a similar structure to the Personal Development segment where a large part of the business still comes from print books. This part is shrinking quickly. But, there is a fast-growing subsegment within the segment. In Education this is Deltak – a 2012 acquisition that provides online program management. Basically, it helps universities manage and bring online their courses. The trend towards digitalization of educational content and making it available online has grown steadily in the recent past and, it is safe to say, is here to stay.

Below you can see the contribution of each segment to Wily’s bottom line after subtracting allocated costs.

John Wiley CTP by Segment 2011-2015Once again, Research looks solid. Professional Development is fighting its way back to profitability. A restructuring program is under way at Wiley and this segment appears to be on the mend. As already noted, I think it is likely that the segment will at least stabilize, and possibly grow, once print is cut to size.

Education is looking awful on the chart, but this due to the heavy expenditure on building up the technology and content management platforms necessary to make Wiley’s solutions a compelling offer for universities.

My baseline scenario is that:

  • Research stays as it is or grows at a very slow pace.
  • Professional Development stays the same, but the mix changes.
  • Education grows moderately, but still requires a lot of investment for some time.

Based on this, I get pre-tax income of $200-220 million and free cash flow of $270-300 million. All in all, the shareholder value is in the range of $3-4 billion while the price is $2.4 billion. Taking the midpoint gives us a 50% upside. Not stellar, but definitely more reliable than any of the other ideas I have at this time.

Net debt is $580 million, representing just 1.5x EBITDA. The company is generating sufficient cash from operations to service it. Acquisitions may bring the debt burden up, but those have to be judged on their own merit.

Finally, the cherry on top is that Wiley pays a decent dividend, yielding 2.87%. Recently, this has represented 40% of net income. Additionally, the company repurchases shares opportunistically (around $45-50 per share). I would say shareholders are well taken care of.

Overall, John Wiley is a solid business trading at a discount to fair value.

Go ahead and use comments section or email me if you would like to share your thoughts on John Wiley.