Tying Theory to Practice
Quarto Group seem like a logical stock to take a look at after my post last week (somewhat tangentially related!) on media stocks and their book metrics. While they're not really in the stable of business I analysed there, they do share a lot of the same characteristics - which we'll come on to later. Importantly from my point of view, they're small in market cap terms, and earn consistently good profits bar an exceptional dip in '08. That's a nice base from which to start any investigation, as those two factors - small enough to induce some sort of pricing inefficiencies and cheap enough (on P/E terms) to offer good long-term returns, on average, strike a chord with my methods. That's the logic behind the very first step, so it's from there that I go into more detail.
Quarto are in publishing, but with a few key differences from firms that may immediately spring to mind. The most important one is probably the type of books they are producing. Instead of focusing on fiction, a rather hit & miss affair that hopes to churn out a few bestsellers every year to compensate for some of the flops, Quarto have a varied portfolio of books with very narrow remits and niche audiences. Perhaps I could best illustrate this with their best selling book in 2010: 'Complete Guide to Wiring'. By focusing on books for such small groups of people and keeping such a wide portfolio, Quarto remain fairly insulated from the more brutal swings in consumer spending. Revenue, as we see from the graph, is more resilient than one might perhaps expect through a recession; I was particularly impressed that none of their books brought in more than 1% of their revenue. That's no mean feat, and is diversification any investor would be proud of! (more…)