- Step-up in organic growth
- AI opportunity
Relx (REL) is the jewel in the FTSE 100’s (slightly rusty) crown. The information services group has outstripped the UK index year after year, and is famed for its predictable income, high returns on capital and ability to deliver throughout the economic cycle. Such hallmarks of quality are hard to come by – but they do exist elsewhere.
Wolters Kluwer (NL:WKL) is a business intelligence provider based in the Netherlands. It makes money by selling access to databases, journals and analytics, as well as providing compliance software. Like Relx, it started life in print publishing in the 1800s and has since reinvented itself as a provider of digital subscriptions to healthcare, financial and legal professionals.
Both publishers occupy an enviable position in the media sector. Over more than a century, Relx and Wolters Kluwer have curated huge databases and established themselves as go-to authorities for different industries. This has created a “formidable barrier to entry”, according to Morningstar analyst Rob Hales.
It helps that their tools quickly get embedded in operations and typically represent less than 1 per cent of a customer’s total cost base, meaning the desire to switch providers is low.
The majority of revenue at these companies recurs, and operating profits sit well above 20 per cent. Cash generation is also strong and shareholders feel the benefit. Relx announced a £1bn buyback for 2024 and deployed £800mn in 2023. Wolters Kluwer – which has not cut its dividend for 35 years – has also been upping its buybacks, from €250mn in 2019 to €1bn in 2022 and 2023.
At the heart of both businesses are two long-standing chief executives. Relx’s Erik Engstrom has been in post since 2009 while Nancy McKinstry took the helm at Wolters Kluwer in 2003.
Picking a winner
Most UK investors will be more familiar with Relx than its Dutch counterpart. However, from a shareholder’s perspective, Wolters Kluwer has outperformed Relx over the past five and 10 years, having achieved an average share price return of 21 per cent per year since the financial crisis.
Wolters Kluwer has also delivered higher earnings per share growth, as shown by the graph below. Much of this could relate to its scale: it is about half the size of Relx, with a market capitalisation of €34.3bn (£29.3bn) compared with Relx's £62bn. It has had more scope to grow, therefore, while still enjoying a huge market presence. This last point is crucial given the high fixed costs involved in building databases. US rival Clarivate (US:CLVT), which has a market cap of just $4.5bn (£3.6bn), has struggled because it has been forced to pump a larger proportion of its sales into product development.
Still, the past may be all well and good, but what about the future?
A key sticking point for quality companies like Relx and Wolters Kluwer is valuation. Relx trades on a forward price/earnings ratio of 26.4 times, and Wolters Kluwer’s multiple is even higher at 28 times – a 15 per cent premium to its peer group. Both have become more expensive over the past five years, and Wolters Kluwer’s valuation is now 'close to record levels', according to Konrad Zomer, senior analyst at ABN Amro-Oddo BHF.
“This is uncharted territory for all these metrics, and by definition it needs to be seen how these parameters will evolve.”
Yet Zomer is ultimately positive, saying he experienced the same pushback in 2006 when he first started covering the stock. The shares have risen more than sevenfold since then.
There are certainly reasons to be optimistic. Wolters Kluwer’s organic growth has been steadily improving, as have its operating margins. “We believe that this 6 per cent organic growth rate is sustainable for at least the next three years,” said Zomer.
Morningstar’s Hales is similarly cheerful, forecasting “fairly stable, mid-single-digit revenue growth” as the businesses shift further towards software and analytics and away from reference materials.
“Margins should creep upward incrementally from operating leverage as they continually extract benefits from increasing scale,” Hales added.
A new type of intelligence
Generative artificial intelligence (AI) could be a game-changer. So far, neither Relx nor Wolters Kluwer have set precise targets around AI and any forecasts that have been published are highly speculative – and often don't address the possible risks.
Technological disruption could disrupt the publishers' traditionally stable markets, for example. Meanwhile – although management teams have said profits will not be affected – it’s possible that research and development costs will rise as companies battle to keep up with the latest tech.
Product development spending (including capitalised spend) currently amounts to about 11 per cent of revenues at Wolters Kluwer, and the group recently doubled the number of full-time employees that report into its core product development team.
The long-term impact could be very positive, though. “Outcomes delivered by large language models are… only as good as the quality of the underlying data, with a need for trusted sources that are citable and verifiable,” concluded analysts at Société Générale and AllianceBernstein.
Relx and Wolters Kluwer have a natural advantage here, as their data sets are trusted and proprietary, meaning external players cannot access them to train their models.
It is early days and many analysts are predicting gradual progress rather than explosive change. This fits with the trajectory we have seen so far for the two companies. While not the flashiest stocks on the market, these steady profit compounders have outshone most of their media peers – and could have plenty more to give.
