A "Biblical" Buy
03/03/2006 12:00 am EST
Clearly, discussions of religion fall outside the bounds of a financial advisory service. However, Marc Gerstein, editor ofThe Reuters Value Review, sees an intriguing "value" opportunity for investors in Thomas Nelson, the leading player in religious publishing.
"There is a substantial contingent of the US population that believes conventional media gives short shrift to spiritual and Christian values. I’m not inclined to get into debates like that. But the low profile a stock like Thomas Nelson (TNM NYSE) has may give long shrift to the agenda of a value-oriented investor. In spiritual/Christian publishing, TNM is the giant. It’s huge. Last month, TNM titles occupied six slots on the Christian publishing top ten bestseller list. And that’s not unusual. TNM is habitually the key name at the top.
"And unlike secular publishers, it doesn’t have the high-risk burden of having so much (in terms of investment case) being dependent on its ability to keep cranking out new hits. To be sure, TNM is not at all shy about new titles (in the last three fiscal years, it released 452, 480, and 523 new ones respectively). But it’s backlist has a lot more life to it than is often the case in media: in fiscal 2005, about 45% of book division revenue came from the backlist.
"TNM’s potential to continue to build its asset base remains powerful. It has a huge distribution network including Christian bookstores, general bookstores, mass merchants, as well as direct sales to consumers, churches, and ministries. That makes it quite appealing to big-name authors in this genre. The book division is humming along nicely, helped in particular by such events as the Revolve conference (for teenage girls) and the movie The Chronicles of Narnia, two examples of the kinds of catalysts that can add extra spark to demand for inspirational literature.
"Thomas Nelson is also a major Bible publisher. Presently, there are nine major English-language translations published by TNM including the 1611 classic King James version. Three important ones, the 1982 New King James version, the 1983 International Children’s Bible, and the 1984 New Century Version are Thomas Nelson exclusives. Meanwhile, a s classic as the Bible product line might seem, it’s actually quite a vibrant business. For one thing, new translations are being developed. Technology is another aspect. There’s digital publishing of the Bibles themselves. Also, new media presents new opportunities for disseminating commentaries, study guides outlines, and so forth.
"As part of our investment approach, we estimate how much future earnings growth is needed in order to justify the stock price. My basic valuation of TNM indicates that the stock would be reasonably priced if the five-year average annual EPS growth rate can equal or exceed 7.9%. That’s well below the 16.7% Wall Street consensus growth-rate expectation. Moreover, my valuation is conservative. If I look ahead to the soon-to-commence 3/07 period, the growth-rate requirement would fall to 5.1%— a big improvement on an already attractive scenario that bolsters the bullish case."