Amazon’s management tells us to chalk these results up to strong sales around the world for books, music and electronics — plain and simple.

On the heels of that, we have the climax to the greatest series in publishing history in the form of final chapter of Harry Potter hitting store shelves. That franchise alone has been a huge boon for Scholastic (SCHL: NASDAQ) and Bloomsbury (BMBYF.PK: Other OTC), but leaves them with a huge void to fill.

Literacy — whether it’s been sparked by the need to use the Internet, the need to secure better jobs, or simply because more people want to read — is on the rise.

Back in the year 2000, there were an estimated 860 million illiterate adults around the world, according to the United Nations Educational, Scientific, and Cultural Organization (UNESCO). It forecast by 2015 literacy will increase around the globe by 7%.

So how do you play a secular trend like literacy with small-caps?

One way to play it is through an interesting small-cap publisher that’s been around since 1824, Courier Publishing (CRRC: NASDAQ). Courier is technically both a publisher and an actual book manufacturer. It is the fifth-largest book manufacturer in America with a dominant share of the Northeast.

In fact, 82% of its total sales come from book manufacturing. Of those, educational texts, religious titles and specialty trade titles make up the bulk of sales.

The publishing business is highly competitive. It’s estimated that there are 43,000 printing companies in existence, and that doesn’t even take into account the myriad of newspaper companies that dot the U.S.

Book and magazine manufacturers are an interesting group. One day, they might be churning out 10,000 copies of a top children’s book, and the next day that very same firm might be cranking out a contract for the most lurid, adult publication imaginable. But that’s where Courier has traditionally had an advantage over the competition. Our sources in the industry tell us that Courier has refused to take on adult publication contracts, which gives them a huge boost when negotiating for religious book deals and other morally sensitive clients. Courier’s reputation sets it above the bulk of its competition.

And that “above the board” approach to the book business, over the last five years, has brought it returns that outpace the two public companies on either side of the Atlantic that largely control the Harry Potter series.

CRRC stock is trading at 16.5x earnings, 2.5x book, and 1.6x sales. All of these multiples are slightly below CRRC’s 5-year average, and its earnings and book multiples are below industry averages at the moment. And it has a dividend yield of 1.7%.

This is an interesting way to play rising literacy around the world without the exposure to publishers desperately seeking the next Potter.

Until next time,
Craig
July 26, 2007

P.S.: My co-editor, Greg Guenthner, has been studying these lucrative markets that are overlooked by Wall Street and is giving you the chance to jump in on the incredible gains he has produced in his newsletter, Penny Stock Fortunes.

Small-Cap Book Publishers was originally featured in the Penny Sleuth.