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  No best-seller discount on Indigo shares

BENJ GALLANDER and BEN STADELMANN

Friday, August 11, 2006

Each summer, at the annual BookExpo held at the Metro Toronto Convention Centre, publishers peddle their wares, people connected with the literary world do some networking, and authors risk their carpal tunnels as they sign autograph after autograph.

As part of the fair, the "Writers to Readers" event strives to "Link the Content Creators to the End Users." The technological revolution that has taken place over the past decade has radically changed the book business, altering the nature of those links.

Panels featured such luminaries as Tom Turvey from Google, Jeff Steele from Amazon, blogger/activist Judy Rebick, and the entertaining Kevin Smokler, founder of The Virtual Book Tour.

Prior to the Internet, buyers would typically browse in bookstores. While to some degree this remains the standard practice, books in the digital age are now regularly perused and purchased online. The only page turning that takes place involves clicking on the next link.

This change has led to far-reaching transformations, not only in the way books are marketed, but to authors as well. The literary wordsmiths still generally love their book tours, which offer the chance to schmooze with the media and flog their wares while eating free food and drinking alcohol aplenty.

However, the experts say that permeating the Internet via blogs has become de rigueur for marketing. As was expressed again and again at the Writers to Readers event, without this presence, a major demographic is being missed, which is dangerous if one covets the under-35 age bracket.

Tapping into this new-age world is Indigo Books and Music. The stock, which traded as low as $4.00 in 2004, is currently cruising around the $16 level. Sales increased six percent this past quarter year-over-year to $170 million, the fifth straight revenue uptick. The first-quarter loss was reduced from $8.1 million to $5.8 million.

The balance sheet is in very reasonable shape, and investors can be comforted knowing that the deep pockets of the marital team of chief executive officer Heather Reisman and Gerry Schwartz, head of Onex, are backing this enterprise.

The company's Chapters, Coles and Indigo divisions control an estimated three-quarters of Canadian book sales are generated via these outlets making the Indigo umbrella the most potent channel for literary works in Canada, not counting the public libraries. Perhaps "oligopoly" is the better word.

Is Indigo a good investment at this juncture? In 1999, shares of precursor Chapters Inc. reached a high of $36.50. Indigo, at its current price, seems fairly valued until they can score regular earnings on an ongoing basis.

Irrespective of the digital age, there is little to compare with turning the pages of a good summer read on a lounge chair with an icy gin and tonic and the lapping of waves. Even in winter, paper and a couch beat the heck out of a book on a computer or iPod. In our opinion, digital revolution figured in, books in print are here to stay, warming the night table by the bed.


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