Scholastic Stock: Fairly Valued (NASDAQ:SCHL)

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School Corporation (NASDAQ: SCHL) is a defensive business that has demonstrated its ability to maintain strong gross margins despite disruptions from COVID and skyrocketing inflation. The company also used the pandemic as a catalyst to restructure its business, structurally improving operating margins. Going forward, there is still an upside for the company’s finances, if book and fair volumes return to pre-pandemic levels. However, I think the stock is fairly valued at 15.9x Fwd P/E with downside risks if revenues don’t rise as management expects.

company overview

Scholastic Corporation is the world’s largest publisher and distributor of children’s books and media. Scholastic operates book clubs and book fairs in schools, in addition to selling directly to schools and libraries. It also sells books through physical and online stores.

The company organizes and reports its business into three main segments: Children’s Book Publishing and Distribution, Educational Solutions, and International.

The children’s book publishing and distribution segment includes book clubs in schools, book fairs, and sales through physical and online bookstores. It is the company’s largest segment and contributed 58% of F2022 revenue. Education Solutions sells books directly to schools and libraries and accounts for 24% of revenue. International includes the publication and distribution of books and media outside of the United States.

COVID was a huge success for Scholastic

The COVID-19 pandemic in early 2020 was a huge blow to Scholastic’s business, as physical schools effectively closed due to government lockdown measures. From $1.65 billion in revenue in fiscal 2019, Scholastic’s revenue plummeted 21% to $1.3 billion in fiscal 2021 (note that Scholastic has a fiscal year end of May 31). Earnings also fell, from $16 million in net income in fiscal 2019 to a net loss of $11 million in fiscal 2021 (Figure 1).

SCHL finances affected by COVID

Figure 1: SCHL’s finances were deeply affected by COVID (SCHL F2021 10K Report)

The impact on earnings was less than the reduction in revenue, as Scholastic was able to control costs, and selling, general and administrative expenses as a percentage of revenue fell from 48% in fiscal year 2019 to 45% in fiscal year 2019. fiscal year 2021. The company also received approximately $20 million in government subsidies that helped with fiscal year 2021 margins.

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But now business is back to normal

With COVID restrictions lifted in the US and most of the world, business is back on track for Scholastic, with the added benefit of structural cost improvements due to cost reduction initiatives implemented during the pandemic.

LTM revenue through August 31, 2022 recovered to $1.65 billion, essentially in line with fiscal 2019, while operating revenue actually improved to $76 million versus $25 million in fiscal 2019. fiscal 2019 to 45% of sales in the last twelve months (Figure 2).

SCHL financial overview

Figure 2 – SCHL Financial Summary (tikr.com)

The COVID recovery has demonstrated the pricing power of Scholastic

Historically, the theme monopoly has arisen in connection with Scholastic’s book fair and club business. Technically, Scholastic’s book fairs and book clubs don’t fit the description of a monopoly, because if the company raises the price of books too much, students and parents can simply buy books through other channels, like Amazon. .

However, looking at the COVID episode and subsequent recovery, one of the most notable things has been Scholastic’s stable gross margin of 52-53%. Although there has been skyrocketing inflation in the past year due to wage pressures, energy costs and commodity prices, Scholastic’s margin has remained flat.

When input costs increased, Scholastic was able to raise prices to offset the increase and maintain product margins. For example, in a brochure from the spring 2019 book fair, we can see ‘Stinky Pig’ it had a list price of $4.99.

Spring 2019 price

Figure 3: Illustrative Book Price, Spring 2019 (Scholastic Book Fair Flyer)

However, an equivalent children’s book, ‘Pig the Rebel’ is priced at $7.99 in a Fall 2022 book fair flyer, a 60% increase. The fact that children’s book prices have risen so dramatically without causing outrage demonstrates the price inelasticity of Scholastic’s customer base (I’m one of them, as my kids regularly buy books at book fairs Scholastic It’s hard to say no when your child circles 10-15 books she’d be willing to do anythingincluding homework for a week, to get).

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Fall 2022 Book Price

Figure 4 – Illustrative Fall 2022 Book Price (Scholastic Book Fair Flyer)

Now what?

With the reopening thesis largely fulfilled, the question for Scholastic investors is, now what?

According to Scholastic’s management team, there is still a lot of room for improvement in the company’s results. For example, in-person book fair bookings have only recovered to a projected 85% from pre-pandemic levels of 72% in FY2021 (Figure 5).

Comment SCHL Q1/F23

Figure 5 – Comment on publication and distribution of children’s books SCHL Q1/F23 (Presentation for SCHL Q1/F23 inverters)

What this means is that if volumes can recover to 100% of 2019 levels without an excessive increase in SG&A expenses, there is upside potential for revenue and operating profit. For fiscal year 2023, management is targeting revenue growth of 8 to 10% and EBITDA improvement of $6 to $16 million (Figure 6).

Guide F2023

Figure 6 – SCHL F2023 Guide (Presentation for SCHL Q1/F23 inverters)

Using guidance from previous management, I estimate EPS for F2023 to be $2.39 per share (Figure 7). In the base case, I modeled revenue increasing 9% to $1.79 billion. I conservatively modeled a gross margin of 52.5% of revenue. Management estimates an improvement of $11 million in EBITDA at the midpoint, which equates to $166 million in EBITDA and $110 million in operating income. EPS equals $2.39/share, if Scholastic’s effective tax rate is 21% in F2023 (note that the effective tax rate has bounced in recent years due to government stimulus measures and accumulated tax losses) .

SCHL F2023 Estimates

Figure 7 – SCHL F2023 estimates (Author created using historical data from tikr.com)

In the low case, I model a lower revenue growth rate of 8%, a lower gross margin of 52%, and SG&A as a % of revenue of 45%. This leads to $68 million in operating income and $1.47 in EPS.

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In the high case, I modeled revenue growth of 10%, gross margin of 53%, and SG&A expenses constant with the base case. This translates to $127 million in operating income and $2.78 in EPS.

Valuation

SCHL does not have any coverage of Wall Street, so there are no analyst estimates to compare. Based on management guidance and my previous base case model of $2.39 in F2023 EPS, SCHL is currently trading at 15.9x Fwd P/E. This is a slight premium to the Communications Sector median of 14.8x.

Valuation

Figure 8 – SCHL assessment (Looking for Alpha)

However, with a market capitalization of $1.3 billion and minimal debt, SCHL has an enterprise value of $1.2 billion and trades at an EV/EBITDA multiple of 7.2x based on my EBITDA estimate of $166 million, a small discount to to the industry median at 7.7x. .

SCHL VE

Figure 9 – SCHL Business Value (Looking for Alpha)

Scholastic also pays a quarterly dividend that recently increased from $0.15/quarter to $0.20. SCHL’s current dividend yield is 2.1%.

Risk

The biggest risk to Scholastic is a weakening economy, which could lead to revenue and earnings falling short of management’s expectations. For example, stocks took a big hit recently in September when they released Q1 and Q2 2020 results that were substantially weaker than the same quarter last year (Figure 10).

SCHL's share price plummeted

Figure 10: SCHL share price fell in September (stockcharts.com)

Although revenue was flat year-over-year (Figure 11), earnings took a big hit from a loss of $0.79 per share in the first quarter of 2022 to a loss of $1.33 per share (Figure 12). Higher losses in the first quarter were explained by lower sales in the Education Solutions segment which led to a delta of $12 million in operating profit, as well as higher COGS.

Q1/F23 Revenue

Figure 11 – SCHL Revenues Q1/F23 (Presentation for SCHL Q1/F23 inverters)

SCHL Q1/F23 EPS

Figure 12 – SCHL Q1/F23 EPS (Presentation for SCHL Q1/F23 inverters)

There are now higher expectations for the upcoming Q2/2023 quarter, which should show notable improvement for Scholastic to remain on track for 8-10% revenue growth and $6-16 million adj improvement. EBITDA.

conclusion

In conclusion, Scholastic is a defensive business that has shown resilience by maintaining strong gross margins despite disruptions from COVID and recent commodity inflation. The company also used the pandemic as a catalyst to restructure its business, structurally improving operating margins. Going forward, there is still an upside for the company’s finances, if book and fair volumes return to pre-pandemic levels. However, I think the stock is fairly valued at 15.9x Fwd P/E with downside risks if revenues don’t rise as management expects.

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