Wiley Earnings: Plans To Divest Its Noncore Business Fail To Sway Our Long-Term View

We intend to drop coverage of wide-moat Wiley WLY around June 27. Fourth-quarter results (a 5% organic sales drop against flat adjusted EBITDA margin at 34.9%) were overshadowed by news that the firm intends to part ways with its university services, talent development, and CrossKnowledge segments (which in aggregate accounted for nearly 20% of fiscal 2023 sales but just 10% of adjusted EBITDA). In our view, the move allows the firm to focus its resources on the highest return areas. While details have yet to be flushed out, we assume the businesses will ultimately be disposed of at a level commensurate with our intrinsic valuation, resulting in no explicit impact from its decision to slim down on our fair value estimate.

Turning to the core business, lackluster performance in fiscal 2023 (constrained by a handful of transitory factors, including lower levels of research content and content integrity issues) and a tepid fiscal 2024 outlook (low-single-digit sales decline and a 30%-40% downdraft in adjusted EPS), lead us to trim our fair value estimate to $51, from $53 prior. This incorporates our expectation that it will take time to turn the business around. We model a mid-single-digit sales decline during the year to come, and in the face of stepped-up labor costs, interest expenses, and a higher tax rate, we now model just $1.96 in adjusted EPS, down from $4.13 preprint in fiscal 2024. Despite this, we aren’t altering our long-term outlook, calling for low-single-digit top-line growth annually over the next 10 years and adjusted EBITDA margins returning to the low-20s (in line with the historical average). This outlook is premised on our belief that Wiley is well-positioned, given its mix of highly digitized products and services, the extensive breadth of its portfolio, and textbook offerings that entail switching costs. After a low-double-digit rout in shares on the print, the stock strikes us as undervalued, trading at a 40% discount to our valuation.