|
|
|
|
|
|
Friday, May 23, 1997
Scholastic
Corp. HOW DID IT FIND TROUBLE? This company is enough to give you goosebumps. Actually, it did. Goosebumps, R.L. Stine's best-selling series of children's books, has been a runaway hit for book publisher Scholastic Corp. But on Feb. 20, the company announced that it would report a loss in its fiscal third quarter. Retail sales were slumping. After saturating retail channels, Scholastic now found itself facing huge numbers of returns of unsold books. The news caught Wall Street by surprise. The stock, which had traded as high as $78 1/2 in November, opened the next day down 41% at $36 3/4. The stock continued to slide, dipping as low as $20 3/4 before staging a recent rally. On March 5, Standard & Poor's (S&P) expressed a negative outlook on the company. Then on March 12, actual third quarter results showed that revenue dropped to $210.7 million from $216.1 million in the year-ago period. An 8% drop in domestic book sales mixed with increased operating costs and an $11.8 million charge to cover those book returns led to a loss of $0.78 a share for the quarter. BUSINESS DESCRIPTION Based in New York City, Scholastic is a leading publisher and marketer of children's books, classroom magazines, educational software, and instructional materials. It reaches its prime audience of pre-kindergarten through eighth grade students and their teachers through a network of school book clubs and book fairs, as well as through direct mail and retail bookstores. The company estimates that 60% of all elementary school teachers in the U.S. participate in Scholastic's book clubs each year. The company sold 200 million children's books in the U.S. last year, pushing domestic book sales to 71% of revenue. Sales were buoyed by popular series such as Goosebumps, The Baby-sitters Club, and Clifford the Big Red Dog. Animorphs is expected to be another hit. The company has also gone multimedia, with key franchises such as The Magic School Bus, a critically acclaimed animated science television series for PBS. Scholastic has recently made a major push to increase its presence in instructional publishing, especially with core curriculum offerings such as the Literacy Place reading program. FINANCIAL FACTS Income Statement
12-month sales: $994.2 million
12-month income: $13.7
12-month EPS: $0.80
Profit Margin: 1.4%
Market Cap: $487.8 million (based on 16.19 million shares)
Balance Sheet
Cash: $2.3 million
Current Assets: $400 million
Current Liabilities: $172 million
Long-Term Debt: $281.8 million
Ratios
Price-to-earnings: 34
Price-to-sales: 0.49
HOW COULD YOU HAVE SEEN IT COMING? Aside from a handful of now wealthy put option traders (who are being investigated), Wall Street seemed completely surprised by the bad news. Valuation had presented no red flags either. At the time, the stock traded around 19 times the $3.27 per share consensus earnings estimates for FY97 ending in May, or not far from the 17% long-term growth rate. Individual Investor magazine was even talking up Scholastic as a super stock to own in a down market. Still, investors might have expected the final stages of this Trouble. Absolute surprises have a way of leaving investors disgusted enough to simply bail out. Margin calls can also add to the selling pressure. WHERE TO FROM HERE? Analyst estimates now call for EPS of $1.50 for the fiscal year ending this month and $2.34 for FY98. Due to the losses, we can't run a PEG, but the stock now trades at around 18 times this year's estimate and 11.6 times estimates 12 months out. Using the 17% long-term growth rate, we arrive at a YPEG fair value of $40. The numbers alone make Scholastic look like a bargain. The recent S&P report, however, offered one additional caveat beyond the scary combination of falling book sales and increasing product development expenses: Scholastic has a heavy debt load. The report concluded that '"[f]urther deterioration in credit measures would likely prompt a rating review for a potential downgrade.'' Scholastic's debt is enough to give an investor pause. Still, the company is cutting costs and looking to enliven its more mature businesses. It also has an established brand, numerous profitable franchises, exceptional distribution channels, and strong relationships with popular children's authors. Plus, the third quarter results should have proved a wake-up call to management. Scholastic's strong name recognition alone makes this story worth further investigation. -Louis Corrigan ([email protected])
|
|||||
|
|||||||