Reed Elsevier: Buy, Sell, or Hold?

LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market.

Right now, I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index.

I hope to pinpoint the very best buying opportunities in today's uncertain market, as well as highlight those shares I feel you should hold... and those I feel you should sell!


I'm assessing every share on five different measures. Here's what I'm looking for in each company:

  1. Financial strength: low levels of debt and other liabilities;
  2. Profitability: consistent earnings and high profit margins;
  3. Management: competent executives creating shareholder value;
  4. Long-term prospects: a solid competitive position and respectable growth prospects; and
  5. Valuation: an underrated share price.

A look at Reed Elsevier
Today, I'm evaluating Reed Elsevier  , a professional information solutions provider, which currently trades at 743 pence. Here are my thoughts:

1. Financial strength: Reed has a solid balance sheet with net gearing of 137%, net debt of 2 times operating profits, and interest cover a comfortable 8 times. The company also generates robust free cash flows consistently averaging 400 million pounds to 500 million pounds per year.

2. Profitability: Reed has delivered solid growth the past decade, compounding revenues per share by 4% and operating profits per share by 6%. Also, adjusted earnings and dividends per share have increased by 9% and 7% per year, respectively. Operating margins have been consistently high in the low-mid 20% while return on equity has been excellent averaging 33% over a decade.

3. Management: The company has committed to returning cash to shareholders using the proceeds from the disposal of a number of its businesses to repurchase 250 million pounds' worth of shares in 2012. An additional 100 million pounds were bought back early this year with a further 300 million pounds to be completed by the end of the year.

4. Long-term prospects: Reed operates in a highly competitive field against the likes of Pearson and Thomson Reuters. The company is organized in five primary business areas: Elsevier, technical, medical and scientific information and tools; LexNexis Legal, legal, tax, and regulatory information and analysis; LexNexis Risk Solutions, market intelligence and data analytics; Reed Business Information, data services, information and marketing solutions; and Reed Exhibition, trade and business events and conferences.

The company has a diversified revenue base with North America accounting for 52% of the group total, followed by Europe (29%), and the rest of the world (19%). Revenues are earned through subscriptions (49%), circulation and transaction sales (26%), exhibitions (14%), advertising (6%) and other sources (6%). Elsevier and LexNexis Legal are the company's strongest businesses -Elsevier is the worldwide leader in providing scientific, technical, and medical information; its products have become indispensable to scientists, medical professionals, and students; while LexisNexis Legal is second to Thomson Reuters in market share in the U.S. and third in multiple markets. Elsevier and LexisNexis Legal account for 34% and 26% of revenues and 45% and 14% of adjusted-operating profits, respectively. As of the latest trading update, management reported solid growth in both segments and good strong growth in Risk Solutions and Reed Exhibition. However, this was offset by the continued decline of print revenues and weak legal services market in U.S. and Europe.

5. Valuation: Reed shares are trading at a trailing price-to-earnings (P/E) ratio of 15, which is its 10-year average P/E and a slight premium to the sector average P/E of 13. It also sports a current dividend yield of 3.22%, twice covered.

My verdict on Reed Elsevier
Reed is a good business with solid financial health; a solid record of growing revenues, profits, and dividends; and products with strong competitive positions. However, its share price has already risen by 39% in nine months and looks already fairly priced. There are other shares that offer better value and at cheaper valuations.

So, overall, I believe Reed Elsevier at 743 pence looks like a hold.

More FTSE opportunities
Although I feel Reed Elsevier is a hold right now, I am more positive on the FTSE shares highlighted in "8 Dividend Plays Held by Britain's Super-Investor." This exclusive report reveals the favorite income stocks owned by Neil Woodford -- the City legend whose High Income fund turned 10,000 pounds into 193,000 pounds during the 25 years to 2012.

The report, which explains the full investing logic behind Woodford's dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

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The article Reed Elsevier: Buy, Sell, or Hold? originally appeared on Fool.com.

Zarr Pacificador and The Motley Fool own no shares mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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