Not so long ago, Reed Elsevier was the darling of the City. Chief executive Crispin Davis had shaken up the publisher and produced a remarkably resilient business that saw double-digit earnings growth through the economic downturn.
He has created a company focused on three equal-sized divisions - science and medical publishing, legal journals, and business-to-business magazines - plus a smaller fourth division in school textbooks.
Two problems have queered the pitch. Firstly, we have the establishment by a not-for-profit organisation, the Public Library of Science, of an alternative "open access" publishing system for scientific research, providing content for free. That targets the very heart of Reed's highly lucrative scientific journal business, where users pay to subscribe to its journals or for electronic access to journals' content. Second, a more short-term issue is that the company warned in December that 2004 will not be another year of double-digit growth, since it will up investment in new ventures.
Yesterday's 2003 results seemed to settle nerves and the company's shares ended up 8 per cent as analysts focused on the company's strong recovery story for 2005. For the first time, Mr Davis tackled the "open access" issue and made a pretty convincing case that it is not going to eat up Reed's scientific business. The company believes the rival system is flawed for two reasons: first, it is not covering its costs, and second, it transfers the cost from consumer to producer. Authors and research institutions must pay to be published on open access, between $500 to $1,500 a time, but Reed believes that the cost of maintaining the scientific system - which requires pieces to be reviewed by the authors' peers in journals - is actually $3,000 to $5,000 a paper.
The Public Library of Science is just too new to estimate its long-term impact on the likes of Reed. But the point is that there's no need to panic in the short term.
Reed trades on a forward multiple of 16 times, which seems a fair valuation. Hold.Reuse content