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: Charts, News) 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 Weak educational sales hit Scholastic's bottom line. Other Stocks in the News Apple Inc. Expects To Sell Out Of iPad Minis Today: Barclays Apple expects blowout Black Friday sales numbers. Google Inc Strikes A Deal With European Music Publishers Google inks an unusual deal with European music companies. Copyright 2012 by, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA, Inc.) or its employees responsible.

Published on Nov 26, 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.

Copyrighted 2020. Content published with author's permission.

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