Bluechip: Reed unravels the Web

Reed Elsevier, the Anglo-Dutch publishing group, didn't set the markets alight when it revealed a meagre 1 per cent profit rise in its recent interim results. Even so, the story the company has to tell is an interesting one as it dovetails neatly two obsessions of the market: the world of media, and of information disseminated over the Internet.

Reed is a global heavyweight in publishing, although it has shied away from high-profile areas like newspapers or TV. Instead, it has concentrated on trade and consumer magazines. What such publications may lack in kudos they more than make up for in profits; to the professional subscribers, they count as a "must have" purchase. For example, Lexis is an online search service for lawyers. Three years ago, when Reed bought it, its margins were 11 per cent; they now stand at 20 per cent.

The big question is whether Reed's heavy investment in the Internet will pay off. To date, its moves have at least been tactically astute. It is now Microsoft's partner in scientific, professional and business publishing and information. And it is using the expertise it gained from Lexis to develop ScienceDirect, an online system for accessing all the information in the hundreds of scientific titles Reed publishes.

Moves to boost electronic delivery of information have already made an impact on the bottom line - 20 per cent of revenue being generated from this source now, against 5 per cent five years ago. This share should grow substantially, although the group acknowledges that the costs will be significant.

Reed has also spent pounds 600m on acquisitions this year alone, and chairman Nigel Stapleton has said that money will continue to be spent in this way rather than being returned to shareholders. With a war chest of pounds 1.87bn it is not short of firepower, and a few more juicy deals could well set the shares off on another run.

While investment costs have slowed the growth in profits, if one strips out the effect of a strong pound, the result looked more appealing - operating profits rising by 10 per cent to pounds 459m.

Reed is also getting out of book publishing, with a sale of the children's book division expected any day now. With sterling relinquishing its gains against the mark, currency effects in the second half should be less of a bother. Market forecasts look for a full-year figure of pounds 850m, or a forward multiple of just below 18, rising to perhaps 20 for 1998. That may seem high, but Reed looks as if it could weather any storms in the wonderful world of online business. The shares remain a strong hold, shading towards a buy for the long term.