It would be a mistake for investors to group Reed Elsevier (NYSE:RELX) with other book publishers. Reed Elsevier, a provider of professional information solutions, operates in five business segments: scientific, technical, & medical; legal; risk solutions; business information; and exhibitions. As these different business segments promise varying profitability and growth prospects, it's necessary to analyze these divisions separately to assess the investment potential of Reed Elsevier.
The good businesses
Reed Elsevier's scientific, technical, & medical segment is essentially its academic journal business. Unlike their trade publishing peers, publishers of academic journals such as Reed Elsevier and John Wiley enjoy strong competitive advantages as their customers and end-users are libraries and academic researchers, respectively.
Research is all about standing on the shoulders of giants who have come before us. Academic researchers place a strong premium on having access to the top journals in their field to facilitate their own research. In the case of John Wiley, the Thomson ISI 2011 Journal Citation Reports defines over three-quarters of its journals as 'high-quality', based on their frequency of citation by other researchers.
Academic journals are mutually exclusive, because researchers don't submit the same articles to multiple journals. As a result, libraries risk incurring the wrath of their professors and students if they were to unsubscribe to John Wiley's leading journals because of price increases. While John Wiley also owns non-academic journal businesses like technical non-fiction books, academic journals accounted for 84% of its fiscal 2013 operating profit.
As for Reed Elsevier, it publishes prominent journals such as The Lancet and The Cell. First published in 1823, The Lancet was ranked second out of 153 journals in the general medicine category by the Thomson ISI 2011 Journal Citation Reports. The Cell, a journal which publishes cutting-edge biomedical research, is equally highly rated, having ranked first among the highest-impact journals from 1995 to 2005, according to ScienceWatch.
The scientific, technical, & medical segment is Reed Elsevier's biggest driver, accounting for 35% and 47% of its 2013 revenue and profits. The segment's high 39% operating margin for 2013 suggests that it has pricing power with its customers.
As for its legal segment, which represented 26% of its 2013 revenue, Reed Elsevier dominates the legal information business together with Thomson Reuters. Like academic researchers and medical practitioners, lawyers and legal students will settle for nothing less when it comes to relying on the most comprehensive legal information for their work.
In contrast, Thomson Reuters' main financial information & analytics business is far more competitive. Raw market data is available to all of its competitors, and there's pressure on Thomson Reuters to constantly introduce new products to keep up with market trends. Thomson Reuters faced challenges with its new Thomson Reuters Eikon launch in 2011, which witnessed technical bugs and customer service issues. However, Thomson Reuters has since turned around the situation, and the product recently received the awards of 'Best Technical Analysis Platform' and 'Best Specialist Product' at the Technical Analyst Awards 2014.
Reed Elsevier's risk solutions business division, LexisNexis Risk Solutions, leverages data, advanced technology, and analytics to assist its customers, particularly in the insurance and financial services industries, with risk management, fraud prevention, compliance, and operational effectiveness improvement. LexisNexis Risk Solutions has grown its revenues by a minimum of 4% year-on-year in each of the past four years, while maintaining healthy operating margins of around 40%. One particular sub-segment of interest is auto insurance.
LexisNexis Risk Solutions has been an effective partner with insurance carriers, assisting them in various aspects of the auto insurance process. Firstly, LexisNexis Risk Solutions reduces auto policy quote time from over 20 minutes to below five minutes by providing information on drivers, vehicles, and existing coverage.
Secondly, LexisNexis Risk Solutions claims to help its clients save up to 50% of their compliance costs through systems which help report liability coverage information to state regulators and notify auto lenders about insurance coverage lapses.
The not-so-good businesses
Reed Elsevier's business information segment provides much more generic and general information, which suggests low barriers to entry. The same conclusion can be reached for Reed Elsevier's exhibitions segment. Reed Elsevier has only 5% market share of the global exhibitions market.
The exhibitions market is fragmented with the top 14 players accounting for about a fifth of market share, making it difficult for Reed Elsevier to gain sufficient market share to enjoy economies of scale. The sheer number of competitors and the resulting competitive rivalry mean that Reed Elsevier has limited leeway to raise prices.
The numbers speak for themselves. The operating margins of 20% and 25% of Reed Elsevier's business information and exhibitions segments, respectively, pale in comparison to that of its scientific, technical, & medical segment at 35%.
Foolish final thoughts
It's reassuring to know that Reed Elsevier's 'good businesses' account for 77% and 85% of its 2013 revenue and operating profit, respectively. The future looks equally promising, as Reed Elsevier has historically shown a willingness to shape its portfolio to improve its revenue and profit mix. It completed 20 acquisitions and 26 divestments in 2013, which led to 3% growth in revenue and expansion of ROIC by 40 basis points.