What could be more exciting than being the publisher of two of the best-selling book series of all time? How about if movie tickets for one of those series are already selling out days in advance of its premiere?
Such is the case with Scholastic Corporation (NASDAQ:SCHL), the very happy publisher of both the Harry Potter and Hunger Games books for young people. The question is whether book sales alone are enough to keep the company afloat given all the competition kids have these days in their electronic devices.
Well, Scholastic is doing just fine. It’s diversified beyond books, and if that diversification continues, it could mean solid returns for investors.
Remember, Scholastic is the brand-name educational publisher in our schools. It distributes educational-technology products and services, curriculum materials, children’s books and collections, classroom magazines, and print and online reference and nonfiction products for grades pre-K to 12 to schools and libraries.
Scholastic does indeed take advantage of advances in media consumption by producing programming and digital content for various platforms from its 500-title library. The company also produces software-driven content for handheld and console products and operates a direct-to-home catalogue business specializing in toys.
The problem with Scholastic is that its earnings stream is unpredictable. Like movie studios and other media entities, such as Walt Disney (NYSE:DIS), Lionsgate (NYSE:LGF), and Dreamworks Animation Studios (NYSE:DWA), Scholastic’s revenue streams can be highly dependent on any one or two given pieces of content.
That’s why the company had a small loss in 2009 ($15 million), recovered nicely in 2010 to a profit of $56 million, fell back to a a profit of $40 million in 2011 and is on track to deliver about $60 million in profit this fiscal year. Cash flow can also fluctuate quarter to quarter, but it usually ends up ahead and is already up to $87 million in free cash flow for this fiscal year.
Analysts have estimated a 9% annualized growth rate over the next five years, and I think that’s probably a safe estimate. I might even jack it up to 11% because the Hunger Games film is already generating strong reviews, and its sequels will likely score big with audiences as well. So a P-E of 11 on the company’s earnings of $1.95 this fiscal year suggest fair value of only $20. The stock, however, is benefiting from the widespread anticipation of the film’s release, so the shares are wildly overvalued at $36.72 right now.
I think Scholastic is a good play for the future, and I’d keep an eye on it. If you hold it, I’d sell now, since the euphoria surrounding the film is priced in, and look to buy back in if the stock drops.