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Beyond Book Smarts

The people at publisher John Wiley are taking a page from the digital age.

During its nearly two centuries in business, John Wile & ySons has published Edgar Allan Poe, Herman Melville and Charles Dickens. More recently, it published Houseplants for Dummies. Hey, you don't reach the cusp of your third century without being able to adapt.

That's a message investors should keep in mind when considering Wiley shares, which, at $33 in mid August, look attractive. True, the company will be hard-pressed to match the annualized 18% earnings-per-share growth it generated over the past decade. Much of that spurt was fueled by the 2001 acquisition of consumer and trade-book publisher Hungry Minds, owner of the popular "For Dummies" guides.

But Wiley, which began in 1807 as a small New York print shop, is in a strong position. Now based in Hoboken, N.J., the publisher boasts a group of businesses that generate reliable earnings and has launched a variety of electronic initiatives that are providing new sources of income. Further acquisitions are a priority, says chief executive Will Pesce.

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With its stable of computer and business titles, and recognizable brand names such as Frommer's travel books and CliffsNotes study guides, Wiley doesn't depend on blockbusters. Says Pesce: "Fiction publishers get all their revenues in six to nine months. Our books have useful lives of years."

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Wiley also publishes more than 2,400 scientific, technical and medical journals, which are sold mainly through subscriptions, and it is a major textbook publisher. These businesses tend to weather slowdowns in consumer spending well.

New growth will come from developing electronic versions of Wiley's holdings and using them to create new products. For example, the company has digitized virtually all of its research journals dating back to 1799, allowing Wiley to charge on a per-article basis as well as by subscription. In the textbook arena, Wiley offers combinations of printed books, downloadable text, tutorials and other services. Rather than cannibalizing its print business, Pesce says, the electronic products will improve profits because they reduce the company's investment in pricey multicolor textbooks. Also, Wiley does not face the expense of having one in four unsold books returned.

The electronic initiatives will take time to pay off. Morningstar analyst Michael Corty estimates that Wiley's operating margin (operating income divided by sales) will average 15% over the next five years, a modest improvement over the 14% of the previous five years. But the company is adding a steady stream of new book and journal titles, and it's striking new publishing partnerships (with Microsoft, General Mills and MTV, among others).

Wiley says it expects 8% to 9% earnings growth for its current fiscal year, which ends in April 2007. The stock (symbol JW.A), which is down 20% over the past year, trades at 20 times estimated year-ahead earnings. That's a premium to the overall market's price-earnings ratio of 15, but Stifel Nicolaus analyst Drew Crum notes that Wiley's earnings are fairly predictable and that the risk of a disappointment is below average. He thinks the stock is worth $39.