Value stocks represent a key part of any high-quality diversified portfolio. This is especially true in a high interest rate environment such as the one we find ourselves in now, as value stocks tend to I pass due to the fact that they often return substantial cash in the short term compared to growth companies which will return cash later in time.
Finding stocks that trade at low valuations is relatively easy given that there are many companies with poor prospects that trade at cheap valuations. However, many of these companies are value traps due to significant near-term challenges.
By most conventional measures, John Wiley & Sons (NYSE:WLY) is a very cheap stock. While the research and publishing business is generally difficult due to high levels of competition, WLY has built a strong reputation and has been in BUsINEss for 216 years. For this reason, I believe WLY is worth a look for any serious value investor.
WLY is a global leader in the research and publishing business of career-related education. The company is primarily a digital company with ~85% of revenue generated from digital products and technology-enabled services.
WLY benefits from a high rate of recurring revenue representing ~57% of total revenue.
The company operates with two business segments: research and learning. The research segment, which accounts for ~66% of total adjusted revenue, provides peer-reviewed scientific, technical and medical publications, content platforms and related services to academic, corporate and government clients. The learning segment, which accounts for ~33% of total adjusted revenue, provides educational services including print and digital books, digital courses and corporate learning offerings.
Over the very long term, WLY has generated solid returns, but still lags behind the S&P 500. Over the past 30 years, WLY has delivered a total return of 1,150% compared to a total return of 1,540% provided by the S&P 500.
However, performance over more recent time periods has suffered. Over the past 10 years, WLY has delivered a total return of -20% compared to a total return of 199% delivered by the S&P 500.
Highly competitive industry facing age-old headwinds
Both research and learning businesses are highly competitive. In the learning business, WLY competes with McGraw Hill, Pearson (SOP), school (SL), 2U (HOLE), Cengage, FDM Group and many other players. On the research side, WLY competes with RELX, Springer Nature, Informa, Wolters Kluwer and many others.
In addition to being highly competitive, both research and learning businesses have relatively low barriers to entry as smaller new competitors can often enter the market.
The learning publishing industry has faced secular challenges due to the shift away from print books to digital offerings. Historically, educational textbook publishers relied on companies such as WLY to print and distribute textbooks, but that model has been discontinued. Authors can now publish digitally without the need for physical books, which has eroded WLY’s competitive edge.
A highly competitive industry coupled with secular challenges has resulted in industry players generating mid- and low-digit profit margins.
In June 2023, WLY announced plans to divest its non-core education business, including University Services, Wiley EdgeAND Cross knowledge. In total, these businesses generated $393 million in revenue (19% of the company’s total FY 2023 revenue) and $43 million in Adj. EBITDA (10% of total company FY 2023 Adj. EBITDA) during FY 2023.
While the company has not yet completed the sale of these assets, the company noted in its Q1 FY 2024 conference call that:
We are working through the sales processes for University Services, CrossKnowledge and Wiley Edge. We found a high level of buyer engagement, although the market remains challenging. Given the ongoing processes, we are not yet able to provide the expected timing or revenue. As you know, we are eager to complete these transactions so that we can reap the full benefits of simplification, including moving even more aggressively to our cost base.
FY Q1 2024 results
On September 7, 2023 the company reported the results of the first quarter 2024 which highlight the challenges facing the business.
A significant driver of weakness during the quarter was the previously disclosed release pause at WLY’s open access publisher Hindawi due to a series of “compromised articles”. Excluding the impact of Hindawi’s first quarter revenue would have increased slightly year over year. Moreover, Adj. The EBITDA impact from the Hindawi hiatus was $18 million during the quarter.
Going forward, WLY expects Hindawi to recover and exceed 2023 earnings by 2026.
Another point of weakness in the first quarter of 2024 was the learning business, which reported a 9% decline in revenue in a year-over-year business due to a decline in print sales.
Business Optimization Program and Profit Outlook
As part of its restructuring announced in mid-2023, WLY announced a significant business optimization and cost saving plan. The plan is expected to deliver $100 million in annual cost savings through FY 2026. The company provided an update on its Q1 2024 conference call:
While some of this work depends on the timing of our sales, we have already begun to implement these initiatives.
During the quarter, we made targeted workforce reductions at the corporate level and rationalized additional office space in line with our plan, and most of these savings are reflected in our current outlook. Additional restructuring actions are still to come. As a reminder, from these efforts, we expect to generate run rate savings of $100 million through fiscal ’26. These savings accrue in three areas. One, reducing corporate overhead in line with our smaller portfolio. Our actions will reduce our revenue base by approximately 20%, so we will right-size the organization to reflect this. Second, the elimination of sunk costs related to sales, especially in technology and corporate functions. And three, making operational improvements to reflect a more focused portfolio and a streamlined organization.
Regarding the earnings outlook, WLY reaffirmed its previous guidance for FY 2024 Adj. EPS of $2.05-$2.40. This guidance is in line with current analyst consensus estimates.
On October 10, 2023, WLY announced the departure of Brian Napack as President and CEO and the appointment of Matthew Kissner as Interim CEO effective immediately.
While a sudden CEO change is generally not a good thing, given the recent struggles of WLY’s new leadership it may be just what the company needs. However, the sudden change in leadership could indicate that all is not well in the current quarter.
Dividend and return program
WLY has an impressive dividend history and has raised its dividend for 30 consecutive years. The stock currently yields ~4.6%, which represents a fairly attractive yield on an absolute basis, but is roughly in line with the 10-year Treasury yield.
The dividend looks relatively safe considering the company is alone GROWING that in June 2023. Furthermore, the annual dividend represents a payout ratio of ~63% based on FY 2024 Adj. EPS.
In addition to paying a significant dividend, WLY has also been a repurchaser of its own shares. WLY has reduced its stock count by ~6% over the past 10 years. During the most recent quarter, WLY repurchased 301,000 shares at an average cost of $33.25 per share for a total cost of $10 million.
WLY currently trades at 13.3x consensus 2024 earnings, 10x consensus 2025 earnings. Comparably, the S&P 500 is trading at ~18x consensus 2024 earnings. WLY is cheaper than the S&P 500, but is cheaper for a reason.
WLY has failed to grow earnings over the past 10 years and has experienced significant earnings volatility. Furthermore, it remains to be seen whether WLY can deliver on its turnaround plan to bring the company back to growth. Comparably, the S&P 500 has enjoyed steady earnings growth, which is likely to continue going forward.
WLY appears to be trading mostly in line with public comps like Scholastic and Pearson based on key metrics like the P/E ratio and EV/EBITDA.
On the other hand, WLY is trading quite cheaply compared to its historical average valuation over recent periods.
While WLY is currently a cheap stock, I believe it lacks a catalyst. WLY’s cheap valuation and high dividend yield are offset by the company’s inability to generate earnings growth over the past decade and a highly competitive industry. That said, there are a number of key events that could serve as an important catalyst if they occur in the future.
A potential catalyst that could generate significant shareholder value would be if WLY were to announce that it was open to a sale process. The company could be an attractive target for private equity firms or competitors such as McGraw-Hill Education, which is owned by Platinum Equity.
Another potential positive catalyst that could emerge is if the company is successful in its transformation strategy. A period of positive and consistent revenue and profit growth would make me believe in the company’s long-term strategy.
WLY is currently a cheap stock and trades at just 13.3 times expected 2024 earnings. However, the stock is cheap for a reason as the company operates in a very competitive industry and has failed to deliver growth over the past decade . WLY is in the process of implementing a transformation plan which will reduce costs and focus the business on higher growth opportunities. WLY has continued to generate strong cash flows and is focused on returning cash to shareholders through a growing dividend. The stock currently yields 4.6% and the dividend appears to be safe for now. For these reasons I currently rate WLY a hold and would consider upgrading the stock if a catalyst emerges.
A possible catalyst would be if WLY announced that it was open to a sale process as the company could be an attractive target for a number of players. Moreover, another possible catalyst would be if the company is able to deliver sustainable earnings growth as a result of its restructuring plan which is currently being implemented.