The Odds are Not in Scholastic's (SCHL) Favor
Shares of book publisher Scholastic (SCHL: Charts, News) plunged last week, after the publisher of "Harry Potter" and "The Hunger Games" reduced its profit and revenue forecasts for the rest of the year. Scholastic had rallied strongly over the summer, after "The Hunger Games" film boosted sales of the best-selling trilogy in both digital and print versions.
However, Scholastic now expects full-year 2013 earnings of $1.40 to $1.60 per share - a significant reduction from the $2.40 it originally anticipated. Meanwhile, its revenue forecast was slashed from $2 billion to a range between $1.8 to $1.9 billion. Shares dropped 18% last Wednesday when Scholastic reduced its guidance, marking its worst one-day decline since February 2003. The stock is still up 8% over the past twelve months. Daily Chart
The company attributed its lowered expectations to weaker spending on curriculum materials from educational customers, due to school funding being diverted towards training educators and administrators for Common Core, an upcoming set of math and reading standardized tests. Fear of an upcoming "fiscal cliff" due to an impasse between the Democrats and Republicans has also forced schools to remain cautious with their spending, out of fear of unexpected spending cuts. Scholastic's educational business is its highest margin business segment. Scholastic's flagship educational products include READ 180, a program which helps young students improve their reading skills. With the next film installment of "The Hunger Games" - "Catching Fire" - still a year away, sales of Suzanne Collins' dystopian trilogy have slowed down, while sales of "Harry Potter" are also expected to decrease sharply without future film releases. Hurricane Sandy was also blamed for adversely impacting the company's participation in School Book Fair and Book Club programs along the northeastern coast. Analysts are divided regarding Scholastic's future. Bulls believe that Scholastic's core business will rebound by next year, when the nation's fiscal outlook is expected to firm up. In addition, the company's print business has transitioned well to a higher-margin digital format, boosted by sales of Amazon's (AMZN
) Kindle e-readers and similar tablets. Bears believe that the book publishing and educational businesses could shift rapidly and catch Scholastic off guard, as it relies on a mix of both print and digital formats, as well as educational and consumer businesses, to stay profitable. Most analysts, like Stifel Nicolaus analyst Drew Crum, walk the middle line, rating the stock as "Hold". Crum stated that although Scholastic will likely turn around in 2014, the shift towards digital consumer books and the funding outlook for educational publishing could hurt the company's top and bottom lines. Shares of Scholastic now trade at 10.3 times forward earnings with a 5-year PEG ratio of 1.5. The stock pays a quarterly dividend of 19 cents per share - a 1.89% yield at current prices. Scholastic reports second quarter earnings on December 10. Other News About SCHL Scholastic Falls After Hunger Games' Publisher Cuts Outlook
Scholastic runs out of fuel as it limps into 2013. Scholastic cuts outlook as sales of high-margin products fall
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Published on Nov 26, 2012
By Leo Sun