2023-11-15 07:48:20 ET
Summary
- Value stocks are important in a high interest rate environment as they provide significant cash flows over the near term.
- John Wiley & Sons is a cheap stock with a very long history in the publishing business.
- WLY has significantly underperformed the S&P 500 over the past 10 years and has failed to deliver earnings growth.
- WLY faces challenges in a highly competitive industry and has struggled to deliver growth, but its transformation plan, low valuation and dividend make it worth considering.
- I rate WLY stock a hold but would continue to monitor the situation as there are a number of potential positive catalysts which may emerge.
Value stocks represent a key part of any high quality diversified portfolio. This is particularly true in a high interest rate environment, such as the one we find ourselves in now, as value stocks tend to outperform due to the fact that they often return significant cash in the near term compared to growth companies which will return cash later in time.
Finding stocks that trade at low valuations is relatively easy given that there are many companies with weak prospects trading at dirt cheap valuations. However, many of those companies are value traps due to significant near term challenges.
By most conventional metrics, John Wiley & Sons ( WLY ) is a very cheap stock. While the research and publishing business is generally tough due to high levels of competition, WLY has built up a strong reputation and has been in business for 216 years. For this reason, I believe WLY is worth a look for any serious value investor.
Company Overview
WLY is a global leader in scientific research and career-connected education publishing business. The company is predominately a digital company with ~85% of revenue generated by digital products and tech-enabled services.
WLY benefits from a high degree of recurring revenue which represents ~57% of total revenue.
The company operates two business segments: research and learning. The research segment, which accounts for ~66% of total adjusted revenue, provides peer-reviewed scientific, technical, and medical publishing, content platforms, and related services to academic, corporate, and government customers. The learning segment, which accounts for ~33% of total adjusted revenue, provides educational services including print and digital books, digital courseware, and corporate learning offerings.
Historical Performance
Over the very long-term, WLY has generated solid returns but has still trailed the S&P 500. Over the past 30 years, WLY has delivered a total return of 1,150% compared to a total return of 1,540% delivered by the S&P 500.
However, performance over more recent time periods has suffered. Over the past 10 years, WLY has delivered a total return of -20% compared to a total return of 199% delivered by the S&P 500.
Highly Competitive Industry Facing Secular Headwinds
Both the research and learning businesses are highly competitive. In the learning business, WLY competes with McGraw Hill, Pearson ( PSO ), Scholastic ( SCHL ), 2U ( TWOU ), Cengage, FDM Group, and many other players. On the research side, WLY competes with RELX, Springer Nature, Informa, Wolters Kluwer, and many others.
In addition to being highly competitive, both the research and learning businesses have relatively low barriers to entry as new smaller competitors often can enter the market.
The learning publication industry has faced secular challenges due to a move away from print books to digital offerings. Historically, educational book publishers had relied on companies such as WLY to print and distribute textbooks but that model has been disrupted. Authors can now publish digitally without the need for physical books which has eroded WLY's competitive advantage.
A highly competitive industry coupled with secular challenges has resulted in industry players generating mid to low single-digit profit margins.
Divestitures
In June 2023, WLY announced plans to divest its non-core education business including University Services , Wiley Edge , and CrossKnowledge . In total these businesses generated $393 million of revenue (19% of total company FY 2023 revenue) and $43 million of Adj. EBITDA (10% of total company FY 2023 Adj. EBITDA) during FY 2023.
While the company has yet to complete the sale of these assets, the company did note in its FY Q1 2024 conference call that:
We're working through the sale processes for University Services, CrossKnowledge and Wiley Edge. We found a high level of buyer engagement, although the market remains challenging. Given the ongoing processes, we're not yet able to provide timing or expected proceeds. As you know, we are eager to complete these transactions so that we can reap the full benefits of simplification, including moving even more aggressively on our cost base.
FY Q1 2024 Results
On September 7, 2023 the company reported Q1 2024 results which highlight the challenges the business is facing.
A significant driver of weakness during the quarter was the previously disclosed publishing pause at WLY's open access publisher Hindawi due to a series of "compromised articles." Excluding the impact of Hindawi Q1 revenue would have increased slightly on a year-over-year basis. Additionally, the Adj. EBITDA impact from the Hindawi pause was $18 million during the quarter.
Going forward, WLY expects Hindawi to recover and exceed FY 2023 revenue by FY 2026.
Another point of weakness in Q1 2024 was the learning business which reported a 9% decline in revenue on a year-over-year business due to declines in print sales.
Business Optimization Program & Earnings Outlook
As part of its restructuring announced in mid 2023, WLY announced a significant business optimization and cost savings plan. The plan is expected to yield $100 million in annual cost savings through FY 2026. The company provided an update on its Q1 2024 conference call:
While some of this work is dependent on timing of our divestitures, we've already begun executing on these initiatives.
During the quarter, we made targeted workforce reductions at the corporate level and rationalize additional office space in accordance with our plan, and most of these savings are reflected in our current outlook. Additional restructuring actions are still to come. As a reminder, from these efforts, we expect to generate run rate savings of $100 million through fiscal '26. These savings are bucketed in three areas. One, reducing our corporate overhead in line with our smaller portfolio. Our actions will reduce our revenue base by approximately 20%, so we'll be right sizing the organization to reflect this. Two, eliminating stranded costs related to divestitures, particularly in technology and corporate functions. And three, making operational improvements to reflect a more focused portfolio and realigned organization.
In regards to the earnings outlook, WLY reaffirmed its previous guidance for FY 2024 Adj. EPS of $2.05-$2.40. This guidance is inline with the current analyst consensus estimates.
CEO Transition
On October 10, 2023, WLY announced the departure of Brian Napack as President and CEO and the appointment of Matthew Kissner as Interim CEO effectively immediately.
While an abrupt CEO change is generally not a good thing, given the recent struggles of WLY new leadership might be just what the company needs. However, the abrupt change in leadership might indicate that all is not going well in the current quarter.
Dividend & Buyback Program
WLY has an impressive dividend history and has increased the dividend for 30 consecutive years. Currently, the stock yield ~4.6% which represents a fairly attractive yield on an absolute basis but is roughly in line with the yield on 10 year treasuries.
The dividend appears relatively safe given that the company just increased it in June 2023. Moreover, the annual dividend represents a payout ratio of ~63% based on FY 2024 estimated Adj. EPS.
In addition to paying a significant dividend, WLY has also been a repurchaser of its own stock. WLY has decreased the share count by ~6% over the past 10 years. During the most recent quarter, WLY repurchased 301,000 shares at an average cost of $33.25 per share for a total cost of $10 million.
Valuation
WLY currently trades at 13.3x consensus FY 2024 earnings 10x consensus FY 2025 earnings. Comparably, the S&P 500 is trading at ~18x consensus 2024 earnings. WLY is cheaper than the S&P 500 but it is cheaper for a reason.
WLY has failed to grow earnings over the past 10 years and has experienced significant earnings volatility. Moreover, it remains to be seen if WLY can deliver on its turnaround plan to return the company to growth. Comparably, the S&P 500 has enjoyed steady earnings growth which is likely to continue going forward.
WLY appears to be trading mostly inline with public comps such as Scholastic and Pearson based on key metrics such as P/E ratio and forward EV/ EBITDA.
On the bight side, WLY is trading fairly cheap to its average historical valuation over recent periods.
Seeking Alpha
Potential Catalyst
While WLY is currently a cheap stock, I believe it is lacking a catalyst. WLY's cheap valuation and high dividend yield are offset by the company's inability to generate earnings growth over the past decade and a highly competitive industry. That said, there are a number of key events that could serve as an important catalyst should they occur in the future.
One potential catalyst that could generate substantial value for shareholders would be if WLY announced it was open to a sale process. The company could be an attractive target for private equity firms or competitors such as McGraw- Hill Education which is owned by Platinum Equity.
Another potential positive catalyst that could emerge is if the company is successful in its transformation strategy. A period of positive and sustained revenue and earnings growth would make me a believer in the company's long-term strategy.
Conclusion
WLY is currently a cheap stock and trades at just 13.3x FY 2024 expected earnings. However, the stock is cheap for a reason as the company operates in a highly competitive industry and has failed to deliver growth over the past decade. WLY is in the process of implementing a transformation plan which will reduce costs and focus the business on higher growth opportunities. WLY has continued to generate strong cash flows and has focused on returning cash to shareholders through a rising dividend. The stock currently yields 4.6% and the dividend appears to be safe for now. For these reasons I currently rate WLY as a hold and would consider upgrading the stock if a catalyst emerges.
One potential catalyst would be if WLY announced it was open to a sale process as the company may be an attractive target for a number of players. Additionally, another potential catalyst would be if the company is able to deliver sustained earnings growth as a result of its restructuring plan which is currently being implemented.
For further details see:
John Wiley & Sons: A Cheap Stock Lacking A Catalyst