Bloomsbury and the deadly gallows

Not for the Thrifty 30. Not now, not yet…

The trouble with Bloomsbury is it doesn’t fit either of the templates I’ve been describing: thrifty or nifty. It’s a company with a nifty past, a thrifty present and a most uncertain future.

Blame 2007. That was the year Bloomsbury published the last Harry Potter novel, HP and the Deathly Hallows. It was the year of the credit crunch and the year Amazon launched its eBook reader, the first generation Kindle.

It was also the year, judging by the statistics in the Sharelockholmes database, Bloomsbury stepped down a gear. Instead of returning 14-18% a year on equity as it had in the first seven years of the decade, it settled at a lower level of profitability, typically between 5 and 7%.

Even so the shares are cheap now, and the company is financially strong. Since I wrote about Bloomsbury last month, it’s published it’s half year results, which are, on the face of it, encouraging. Sales and adjusted profits have risen over the same period last year and the company is trumpeting mind boggling growth in eBook revenues (mind boggling, that is, until you think about how low they were to start with and their still small contribution in percentage terms to total revenues).

The market’s valuation is moving away from me though, because, in buying academic publisher Continuum, the company has swapped tangible assets (£20m in cash) for goodwill and intangible assets (mostly publishing rights).

So now its market value of £72m is higher than tangible book value of £52m and the share price, doesn’t look quite as thrifty as it did. Neither does the company, with its cash balance down to under £10m.

Bloomsbury owns intangible assets it ought to be able to profit from though, and if we divide total book value of £107m into £72m we get a cheap-looking price of 0.7 times book value. It’s not that cheap though. Not if the company’s only earning 6% on equity. Then the earnings yield, or the hypothetical return on the current share price is 8 or 9%.

That’s on the low-side, especially considering the uncertainties. The explosion of digital content means its impossible to predict with any certainty what kind of company Bloomsbury will be in ten years time, or who its competitors will be, because publishing is changing so fast and so are the habits of people consuming it. So the shares need to be cheaper to give investors a bigger margin of error.

Bloomsbury’s Nifty credentials are tarnished, and doubly so because the concluded Harry Potter series was a major factor in its Nifty past. Low return on equity in recent years, and the technological threat posed by publishing platforms like Amazon’s and, perhaps, piracy, mean the company is Nifty no more.

Its Thrifty credentials are tarnished too. Using the average ten year return on equity figure (12%) instead of three years (6%) to calculate the earnings yield, it’s an attractive 17%. But I’m going to be hard-headed and assume the earlier returns were abnormal and its more recent level of profitability is more typical.

It’s a shame. The business has been restructured into “one global Bloomsbury” and it’s possible we’re witnessing the early stages of a turnaround.