How to Read the Publishing Industry

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This particular company’s name has been ringing across millions of households and brining smiles on the faces of billions of children across the globe. Scholastic Corporation (NASDAQ: SCHL) is a global publishing company known for publishing quality material for schools, teachers and children. Harry Potter and The Hunger Games are a couple of big success stories associated to Scholastic.

Page Numbers

The second quarter results for Scholastic came on a lower note compared to the prior year quarter, owing to a drop in the sales of The Hunger Games trilogy and a narrowing of margins in its educational business. Net income for the company went down by approximately 25% to $61.8 million, while the EPS fell by 26% to $1.89 per share. Management’s idea to cut costs is highly justified, as the revenue number shows a decline of only 10%, which suggests that the company needs a concrete expense reduction plan to improve the net income numbers.

Super storm Sandy not only affected the homes of millions, but also had an impact on Scholastic’s sale,s as some of its best customer schools remain shut in the wake of Sandy. Also, in terms of school book clubs, even though the number of orders increased, a decrease in customer spending per order offset the positive impact of larger order numbers.

If Sandy proved to be a bane, Thanksgiving partially offset its impact, as some of Scholastic's titles, including The Hunger Games and Infinity Ring series, aroused positive customer interest in terms of holiday gifts. Higher parity in sales is also being seen among product sales and the technology services business, which going forward will reap benefits of better synergy.

Competition?

Amongst others, Scholastic directly competes with the publishing division of The McGraw-Hill Companies (NYSE: MHFI). The higher education wing of the division recently got into a deal with Ancile Solutions, a developer of learning and performance software solutions. This will enable McGraw-Hill to provide digital interactive higher education solutions to its customers. In a move to restructure and reorganize, McGraw-Hill sold its publishing division to a private equity firm for around $2.5 billion.

Another well known name in this industry, Pearson (NYSE: PSO), has also hinted at pursuing a digital strategy in order to fuel growth and expansion. Its investment worth $89.5 million for a 5% stake in Nook Media, LLC definitely signals that Pearson is now looking at using its learning expertise in cyber space. The management has showcased high confidence in this move along with reiterating the forward thinking strategy of the company.

 John Wiley & Sons (NYSE: JW-A) has also been under-performing lately, as it recently posted a drop of 15% in net income for the fiscal 2nd quarter amidst concerns of tougher market conditions for higher education textbooks. As the customer behavior patterns are changing and moving towards a digital path, traditional book publishers have to start framing strategies accordingly. The company has, since January, announced the sale of its consumer travel, culinary, CliffsNotes and other publishing programs.                                                                                                                                        

A stock to keep?

 After the entire story is told comes the climax of understanding if this stock is worth keeping or not. As is clear now, the entire book publishing industry has been facing tough market conditions, as there are visible changes being observed in consumer behavior patterns when it comes to education. Scholastic is no exception to these challenges, and its core performance metrics have declined. However, what is really impressive is the way management has jumped into the situation and designed a cost reduction program that will result in savings to the tune of $20 to $30 million.

 Another point to talk about here is the product and service portfolio that Scholastic has to offer to its customers going into 2013. I am pretty optimistic about some of the new titles that Scholastic has planned for the next year, including the third book in the Infinity Ring series, and a young adult novel called Gorgeous, among others. This will be complimented by the growth initiatives being taken in the field of digital learning, with emphasis on sale of e-books and instructional programs like READ 180, System 44, and MATH 180. This is poised to fuel business growth and acquisition of new opportunities.

Scholastic is currently trading at a P/E of around 12, which is good alignment with the industry P/E, proving that its valuation is justified, and placing it on a stable launch pad for growth. The cash position of the company is fairly good, keeping in mind the fact that Scholastic is making reasonable investments in the digital space and creating novel revenue opportunities. I would recommend investors to hold this stock as we move to 2013, as Scholastic moves ahead with a robust product portfolio and better business control to facilitate higher profitability.

 


MihirMehta has no positions in the stocks mentioned above. The Motley Fool owns shares of The McGraw-Hill Companies. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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