Reed has nowhere to go but down; The Investment Column

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The Independent Online
Reed Elsevier is getting dangerously "boring" - good boring, of course, but dull none the less. How else to characterise yet another set of robust figures, with half-year underlying profits up 12 per cent and another faultless acquisition, in the form of legal publisher Tolley?

The market had been hoping for a big deal, with the names of Reuters, Bloomberg, even Pearson bandied about as takeover targets. In the event, pounds 100m for United News & Media's Tolley, while certainly expensive, is small beer for a pounds 6bn company with net debt of a paltry pounds 250m and interest covered a more than comfortable 19 times.

The City had become used to the company deriving its earnings growth in equal measure from acquisitions and continuing businesses. But since the decision to sell newspapers and consumer magazines, the trend has been toward relying on organic growth to push ahead. Yesterday's interim figures prove that Reed doesn't need to buy companies to keep up the momentum.

There were a few weak spots, of course. The travel information business saw profits decline as the general market moved away from Reed's "hard copy" products and toward on-line services it has yet to develop fully. But management has started to tackle the problem, and expects to reverse the trend by next year, with the introduction of new electronic products.

On the whole, the main businesses showed sharp growth, with legal and other professional product lines leading the way. The excellent Lexis Nexis subsidiary - one of the best buys Reed ever made - is a clear market leader in the area of "must-have" information, for which customers are willing, indeed obliged, to pay a premium.

The Tolley acquisition in the UK complements the existing business grouped under Reed's Butterworth subsidiary. Where the former is strong on the so-called "first point of reference" end of the market, Butterworth dominates the specialist legal and tax sectors. The combination also allows Reed to market the Tolley products - tax guides, for example - to its existing business client base.

The problem is that Reed is performing so well there is really nowhere to go but down. It is a highly rated stock, with a strong - indeed near unassailable - position in its key markets of professional and business information. Those markets offer huge profit margins to the leaders, and come complete with high barriers to entry for any would-be competitor.

This year, the City expects profits of pounds 810m, rising to perhaps pounds 920m. At current year earnings of about 56p a share, the stock is on a multiple of 20 times - justifiable given the quality of earnings, and the consistency of returns, but the upside cannot be huge.

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