Euromoney - Quality at a Reasonable Price (QARP) ?

Trading Update

Euromoney Institutional Investor plc ("Euromoney") issued a resilient pre-close trading update this morning ahead of the announcement of its results for H1 2013.

Global financial institutions continue to make cuts in staff numbers which reduces the potential readership of the Company’s specialist financial, commodity and metals online publications. Revenues for H1 2013 are therefore expected to show a fall of 1%, largely down to timing differences on events. Subscription income, which now makes up a majority of revenue, is expected to remain unchanged.

Despite stagnant sales, pre-tax adjusted profits are expected to be up almost 5% at £51m but this might well prove too conservative. Last year’s trading statement estimated H1 2012 pre-tax profits at £47m but the actual number came in at £48.6m, suggesting pre-tax profits for H1 2013 may come in just shy of £53m.

A Quality Stock ........
Euromoney is a quality franchise, generating operating margins of 29.9% and adjusted returns on total tangible assets of 56%. Companies generating high returns on tangible assets tend to be very cash generative as less need be spent replacing physical assets. Additionally, over half of Euromoney’s revenue comes from subscription income which is paid in advance. The Company can leverage its strong free cashflow to finance acquisitions without recourse to shareholders for new money.

So even if the economic environment remains challenging, Euromoney should be able to continue to grow EPS. In fact, since the onset of the financial crises in 2008, EPS will have risen by nearly 61% by September 2013 (based on consensus forecasts for 2013).

....... At a Reasonable Price

The Company trades on a rolling 12 month P/E multiple of 12.8 and a price to free cashflow multiple of just 10.8. This seems too cheap given the downside risks are mitigated by subscription income, its strong free cashflow funds earning enhancing deals and any global economic recovery will likely boost flagging advertising revenues and further build subscription income.

DMGT plc's 68% shareholding will put off some as will its generous CAP management incentive scheme but despite these negatives, Euromoney is in my view a solid QARP stock.