Scholastic (SCHL) Gets its Game On with 'The Hunger Games'

Shares of children's book publisher Scholastic (SCHL: Charts, News) soared last week after the company posted drastic improvements in its third quarter earnings. Scholastic, a familiar name to American students, received a strong boost from Suzanne Collins' best selling 'The Hunger Games' series, which has been recently adapted to film by Lions Gate Entertainment (LGF: Charts, News). For its third quarter, Scholastic posted a loss of 10 cents per share, up from a loss of 81 cents per share in the prior year quarter.

Revenue rose 22% to $467 million. Analysts on average had forecast a loss of 70 cents per share on revenue of $393 million.

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The company was also able to improve margins across the board. Gross margin was 53%, operating margins remained tight at 0.1%, while net margins were negative at -0.7%. However, all three were improvements over the prior year. Looking forward, analysts expect Scholastic to turn positive in fiscal 2012, earning $2.82 per share on revenue of $2.03 billion. The company raised its 2012 forecast to $2.60 to $2.90 in the coming year, up from its previous projection of $1.75 to $2.10 per share.

'The Hunger Games' franchise, which currently consists of three titles - 'The Hunger Games', 'Catching Fire' and 'Mockingjay' - depict a dystopian world in which children fight for survival by killing each other on live television. The three books are currently in the top five best-selling titles on (AMZN: Charts, News). The first book, 'The Hunger Games', has remained in the top 100 list for 544 consecutive days. There are currently 23.5 million copies in print within the United States, as well as 2.4 million copies of three movie-related titles. By comparison, 'Harry Potter' finished its seven book series with 150 million copies in circulation. The popularity of 'The Hunger Games' strongly suggests that the franchise still has legs to run.

"The series has been building since 2008," stated Scholastic CFO Maureen O'Connell. "The ramp-up this quarter was associated with the movie and the social-media marketing aspects of the trilogy, including all the fans on Twitter." Scholastic expects the strong sales of the series to carry into its fourth quarter earnings. The first of 'The Hunger Games' films is scheduled to be released on March 23rd. Many investors and fans are hoping for a repeat of the Harry Potter phenomenon, with some even starting a "Hunger Games Index" - which includes Scholastic, Amazon, Lions Gate and toy-maker Hasbro (HAS: Charts, News) - as a follow up to the "Harry Potter Index" that tracked stocks that profited the most from the franchise's popularity.

In addition to 'The Hunger Games', Scholastic's 'The 39 Clues' series and 'The Invention of Hugo Cabret' both contributed to its top line. Interest in 'The Invention of Hugo Cabret' was strongly piqued by Martin Scorcese's Oscar-winning film, 'Hugo'.

Revenue in Scholastic's largest division, its children's book publishing and distribution segment, gained 38% due to strong orders of both digital and print books. The segment also reported positive operating income of $23.4 million, compared to a loss of $9.2 million in the prior year quarter. International revenue climbed 11% due to 'The Hunger Games'. These strong earnings helped offset Scholastic's smaller and far weaker educational technology and classroom publishing business, which posted a 4.7% sales gain. The segment was hurt by lower federal funding in the first half of the year, but was helped by stronger sales in Singapore and India.

Shares of Scholastic currently trade at 14.8 times forward earnings with a 5-year PEG ratio of 2.05, which suggests that the stock is fairly valued with slower growth potential. However, 'The Hunger Games' could change all of that, especially if the first movie is well-received and paves the way for a movie and toy franchise.

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A look back at Scholastic's earnings.
Introducing 'The Hunger Games' Index
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Published on Mar 19, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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