Thursday, 24 September 2015

Scholastic as a value stock?

I had never really looked at the youth and education publisher Scholastic before but their Q1 numbers piqued my attention.

As the company was at pains to mention the first quarter is not a key epoch for them (and the reasonably recent EdTech disposal complicated some comparisons) so some of the metrics are not immediately compelling but listening to the conference call some of the notes I made included:

‘excellent’ environment for childrens books

Units for children/young adults above adult (although latter higher price)

Star Wars related, Harry Potter, Minecraft associated books name checked

First quarter revenue increases primarily reflected gains in classroom books, branded libraries and summer reading programs in the Education segment and higher custom and digital sales in the segment's consumer magazine channel, as well as higher sales in trade. 

‘weigh alternatives’ with use of cash / cash flow

Pleased with continued generation of cash

Real estate in New York Soho

Expect to announce plan at time of Q2s (Dec) what precisely they are doing with this 

‘begin construction of new retail site by November’ 

Well that wasn't quite what I was expecting re a publishing company especially one with exposure to the education sector where in the London market I have noted a series of cautious sounding comments by Pearson.  

So let's look at some numbers.  US$1.4bn in market cap, an EV of around a US$1bn once seasonal working capital evens out (the company is still net cash now), inherent profitability (FY numbers reiterated albeit implying a x20+ P/E) and confirmation of either side of US$40m of free cash this year.  

But what about the US$1bn of real estate value? Clearly 'the plan' to be unveiled in December has some uncertainty around it (including taxation) but all of this implies today a very low multiple for the business...despite positive noises about general momentum, profitability and cash flow generation.  

Based on the cash flow you could easily justify a (say) US$400m+ valuation and arguably a good deal more even despite some obvious challenges in book publishing (the majority of their continuing business) and education.  At today's share price that implies quite a big tax hit or wasteful acquisitions.  In contrast to the latter I note from the conference call that management appeared solid, conservative and just a bit cautious. I also noted the whole conference - including Q&A - was over in 30 minutes.  

Value and a relative lack of interest.  Sounds like my type of value name. 

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