Bloomsbury’s compelling narrative

Bloomsbury Publishing (BMY) is one such company. Having shot to stardom shortly after its 1994 float with the publishing rights to the Harry Potter series, Bloomsbury is sometimes dismissed as a one-trick pony, and overly reliant on the boy wizard. In reality, the group has delivered impressive long-term growth, and is successfully diversifying its revenue streams.

Despite a good run in recent years, the group’s shares also look reasonably priced against both historic trends and future prospects, and well placed to continue their ascent, whether or not they are powered by a broomstick.

Canny digital strategy

One such push beyond Hogwarts has been into real-world education. Publishing online material for students, academics, libraries and instructors is now a key business strategy.

When its digital resources arm was first established in May 2016, management predicted it would generate £15mn of sales by the current financial year to February 2022. Last month brought confirmation that this goal will be met. While the division’s overall contribution is still small – total sales hit £185mn in FY2021 – its subscription model is an attractive counterpoint to the peaks and troughs of consumer demand. 

That’s not to diminish the considerable potential upside of literary trends. Bloomsbury’s consumer division was the key driver of growth during pandemic lockdowns, delivering a 61 per cent pre-tax profit rise last year, and this momentum continued into the current financial year. Sales have been fuelled by bestsellers such as Piranesi by Susanna Clarke and Tom Kerridge’s Outdoor Cooking. Amazingly, sales of Harry Potter titles are also still rising, climbing 7 per cent in the 2021 fiscal year, more than 23 years after JK Rowling’s first book was published.

Management will hope that a rediscovered love of reading will outlast the pandemic. If interest wanes, however, Bloomsbury’s digital resources arm should bolster resilience – and profits. Encouragingly, profitability here is also increasing: since first turning a profit in 2020, margins widened from 8.4 per cent to 23 per cent in 2021, and look set to hit 33 per cent based on 2022’s rough-and-ready figures. In turn, this has helped boost the group-wide operating profit margin from 6.8 per cent to more than 10 per cent over the past five years.

Bloomsbury’s focus on online academic resources chimes with its efforts elsewhere. In its latest annual report, for example, the group noted the growing popularity of online retail channels, where it is concentrating its sales efforts. Revenue from digital audio books is also on the rise, and consumer behaviour during lockdown – particularly among older readers – contributed to strong ebook revenue. Digital and non-print sales accounted for 26 per cent of revenue in the first half of 2022.

By contrast, ‘frontlist’ sales – which relate to newly published titles – took a hit in 2021, as products often couldn’t be promoted in shops due to lockdown restrictions. 

Global ambitions

Bloomsbury now wants to tap into the international academic market. In December, it bought US-based publisher ABC-CLIO – which supplies schools and libraries – for £17.3mn in cash. This will strengthen its foothold in North America and should open up new opportunities.

Moreover, Bloomsbury is the only major UK publisher to combine general and academic publishing, which could also bestow a competitive edge at a time when academic institutions and companies more generally are increasingly investing in digital learning materials.

The purchase of ABC-CLIO spotlights another aspect of Bloomsbury’s investment case: the group is awash with cash which can be funnelled back into operations. At its half year, cash stood at £31mn after deducting £12.4mn of lease liabilities, and the business has proved very adept at maintaining healthy cash flows. The group’s free cash conversion rate – which measures the ratio of free cash flow against net profits – has stayed well above 100 per cent for the past four years, levelling out at 149 per cent in the 12 months to August.

As well as funding book deals and expansion plans, strong cash generation allows Bloomsbury to operate a progressive dividend policy, as demonstrated by a steady rise in shareholder distributions over the past decade. In August 2021, investors also received a special dividend of 9.78p a share after a particularly strong year of lockdown trading.

Beating expectations

Bloomsbury’s growth prospects are similarly striking. The group has repeatedly surpassed analysts’ expectations and 2022 has already started well: in a trading update published on 26 January, management said sales were running “comfortably ahead” and profit “materially ahead” of market expectations for the year ending 28 February 2022. Sales were previously due to reach £197mn, while profit before tax and highlighted items was expected to settle at £20.1mn.

Analysts now believe that earnings per share will grow by almost 20 per cent over the next two years. Meanwhile, the free-cash-flow yield is forecast to climb by 6.8 per cent in the same period, pointing to plenty of tangible growth ahead.   

Combined, these factors shed new light on Bloomsbury’s valuation. In October, we concluded that a forward earnings multiple of 20 wasn’t too pricey, but – because shares had already risen by 50 per cent over the past year – it was wise to hold. However, it is important to remember that global equities jumped by 35 per cent over the same period, meaning that this argument could apply to a host of businesses. 

Moreover, given Bloomsbury’s strong position – underpinned by its huge library of rights, reliable management, and cash position – there is scope for a substantial re-rating. 

Bloomsbury's shares also offer a good balance of growth and value, at least when judged against the ‘magic formula’ screening method devised by the US investor Joel Greenblatt. The screen – which compares a company’s earnings yield and returns on capital relative to all equities – ranks Bloomsbury in the top 8 per cent of stocks in the FTSE All-Share, suggesting it stands an above-average chance of beating the market. A cheap rating may in part be explained by the difficulty of measuring the true worth of the publisher’s assets; the rights to Harry Potter, for example, are likely undervalued by traditional accounting policies.

Valuation is not excessive

Paper chain issues

The big challenge for Bloomsbury now is to preserve its margins. Barely a day goes by without a chief executive lamenting supply chain issues, energy prices and the cost of raw materials. Bloomsbury is no exception. At its half-year results, the group warned that print supply chain issues were ongoing, and had so far been mitigated by earlier printing.

Those aren’t the only stormy waters. Last month, containers full of cookery books sank en route to New York, causing their release dates to be pushed back. This side of the Atlantic, a shortage of paper forced Abrdn to delay a shareholder vote on its £1.5bn purchase of Interactive Investor. Sourcing paper used in books and magazines remains a challenge, as more paper mills move into cardboard and other types of packaging. 

Bloomsbury is in a better position than many, however. For starters, it is flexible around when and where it prints its books, and its scale gives it bargaining power to secure space on ships. A widening array of digital products should also help it weather temporary disruption to physical supply chains.

At heart, however, Bloomsbury is still a publishing house. It doesn’t deal in avatars, augmented reality glasses, or the pursuit of hyper reality. As such, it’s unlikely to see the explosive growth eyed up by the likes of Meta (US: FB) and Microsoft (US:MSFT). Fireworks are unlikely, unless a new Harry Potter comes along. However, if you’re in the market for a stock that boasts longevity, and a good mix of value and growth, look no further.