Hiccup at Reed fails to dent confidence

Investment Column
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The Independent Online
Reed's recent failure to sell its consumer books arm was a hiccup in an otherwise happy relationship with the City. Yesterday's full-year figures, showing a 19 per cent jump in pre-tax profits to pounds 723m, did nothing to upset investors' confidence. The shares, which have more than doubled in the past three years, closed 19p higher at 1,057p.

Operating in a rapidly-changing environment, where electronic publishing is making rapid and unpredictable inroads into traditional printed media, Reed has three tasks, all of which these latest results suggest it has safely in hand: managing its existing print operations, keeping ahead of the game as the industry goes electronic and spending its prodigious cash flow.

As far as the first task is concerned, selling out of its lower-margin consumer operations makes abundant sense. The returns, and quality of earnings, to be had from scientific, professional and business publishing are eminently preferable. Elsevier Science, for example, saw profits jump 12 per cent from an 8 per cent sales increase with subscription renewals higher than expected.

Recruitment advertising boosted Reed Business Publishing and operating profits bounced 30 per cent as a result. The IPC consumer magazines managed a 19 per cent profits rise as new products, cover price rises and cost- cutting more than made up for higher paper prices.

The move into electronic publishing was given a huge lift by the December 1994 purchase of Lexis-Nexis which gives Reed an entree into the lucrative and rapidly-growing market among lawyers and other professions for on- line information. One of the big attractions of database publishing is that incremental sales tend to feed straight through to profits once the initial cost of setting up the information is written off - and last year a 10 per cent rise in sales resulted in a 50 per cent boost to profits.

So running its businesses well, and with a good track record on acquisitions, attention now focuses on how well Reed can spend a war chest which the company estimates at as much as pounds 3bn, an amount which would still leave it with a comfortable interest cover of 6 times. No deals are imminent but expect them to be in the US, the largest and most sophisticated market for the electronic publishing Reed has increasingly in its sights.

Looking ahead the outlook appears as bright as ever. One broker is forecasting earnings growth over the next three years of a better than average 14 per cent per annum. Reed offers investors a unique exposure to international information markets, high quality earnings, a strong balance sheet and a pleasing lack of regulatory uncertainty. All that comes at a price, of course, and on the basis of pre-tax profits of almost pounds 800m this year, the shares stand on a prospective p/e of 19. About right.