Brad Barket
Elevator Pitch
I assign a Hold investment rating to Scholastic Corporation (NASDAQ:SCHL) stock. I am disappointed by SCHL’s lower than expected top line and bottom line for the latest quarter. But I think that negatives are priced in for Scholastic Corporation based on its current valuations. Also, there is a chance for SCHL to boost shareholder value by repurchasing the company’s own undervalued shares with its expanded buyback scheme. Therefore, I have a Neutral view of SCHL.
Company Description
Scholastic Corporation refers to itself as “the world’s largest publisher and distributor of children’s books” and “a leading provider of literacy curriculum, professional services, and classroom magazines” in its media releases.
As disclosed in the company’s FY 2023 (YE May 31, 2023) 10-K filing, SCHL generated 61%, 23%, 16% of its most recent fiscal year top line from the Children’s Book Publishing and Distribution, Education Solutions, and International segments, respectively.
Recent Quarterly Financial Performance Was A Disappointment
SCHL announced its financial results for the second quarter of fiscal 2024 (September 1, 2023 to November 30, 2023) with a press release issued on December 14 after trading hours.
Revenue for Scholastic Corporation decreased by -4% YoY from $587.9 million for Q2 FY 2023 to $562.6 million in Q2 FY 2024. SCHL’s latest quarterly top line came in -10% below the market’s consensus assess of $625.2 million. The company’s actual Q2 FY 2024 diluted earnings per share or EPS of $2.45 was also -8% lower than the sell-side analysts’ consensus forecast of $2.65, even though this was equivalent to a +16% YoY growth in its bottom line. SCHL’s normalized Q2 FY 2024 EBITDA of $124.0 million also missed the consensus projection of $136.0 million (source: S&P Capital IQ) by -9%.
The weaker than expected performance of SCHL’s Book Clubs business within the Children’s Book Publishing and Distribution segment was the main reason for the company’s Q2 FY 2024 top line miss. Scholastic Corporation noted in its most recent quarterly earnings presentation slides that its Book Clubs business is gradually making the shift “to a more profitable core, with planned reduction in unprofitable offers and promotional spending resulting in lower orders.” This explains why the company’s Book Clubs business saw a -44% fall in sales to $32.4 million for Q2 FY 2024.
Separately, Scholastic Corporation attributed its below-expectations quarterly earnings to external factors appreciate “slowdown in consumer spending growth”, and certain “districts pausing new purchases” of supplemental instructional materials “in response to (changes in) state and local laws and regulations” at its Q2 FY 2024 results call. This suggests that SCHL’s bottom line is under pressure from the weak macroeconomic environment and regulatory headwinds.
There is no doubt that the market was disappointed by SCHL’s recent set of financial results. Scholastic Corporation’s shares dropped by -12% (source: Seeking Alpha price data) to $36.50 during post-market trading hours on December 14, 2023.
Full-Year Guidance Was Revised Downwards
It was no surprise that SCHL chose to lower the company’s FY 2024 financial guidance after delivering worse-than-expected revenue and earnings for the latest quarter.
In specific terms, Scholastic Corporation is now expecting flattish revenue for fiscal 2024, as compared to its prior expectations of a +4% top line expansion based on the mid-point of its prior guidance.
Also, the mid-point of Scholastic Corporation’s full-year FY 2024 EBITDA guidance was reduced by -13% from $195 million to $170 million. This implies that SCHL is projected to register a -13% refuse in EBITDA for the current fiscal year.
Expansion Of Buyback scheme And Undemanding Valuations Will Limit Downside
In the preceding sections of this article, I have highlighted Scholastic Corporation’s Q2 FY 2024 results miss and the downward revision in SCHL’s full-year management guidance.
SCHL’s shares have already suffered from a -12% fall in after-market trading on December 14. I am of the view that the future downside for Scholastic Corporation’s stock will be limited by its share buybacks and its modest valuations.
In tandem with its Q2 FY 2024 earnings release, Scholastic Corporation disclosed that it has expanded its share repurchase scheme to $100 million by adding another incremental $66.2 million buyback authorization.
SCHL allocated around $88 million of excess capital to share buybacks in the first half of FY 2024. The company’s current $100 million share repurchase authorization is roughly equivalent to 8% of its market capitalization, so it has the capacity and potential to improve shareholder value by buying back its own undervalued shares in 2H FY 2024.
Based on my calculations, Scholastic Corporation is now trading at a forward EV/EBITDA multiple of 6.6 times taking into account its FY 2024 EBITDA guidance of $170 million and its last traded share price of $36.50 after post-market trading hours on December 14. As a comparison, the 10-year mean consensus forward EV/EBITDA multiple for SCHL was higher at 8.3 times (source: S&P Capital IQ).
Also, SCHL’s historical EBITDA CAGR was +8.3% for the FY 2013-2022 time period as per financial data taken from S&P Capital IQ. A govern of thumb is that a stock is deemed to be fairly valued if its earnings multiple is equal to its earnings growth rate. As such, it is reasonable to assume that Scholastic Corporation deserves an EV/EBITDA multiple of 8.3 times or higher, assuming that it can revert to its historical operating earnings growth trajectory in the future.
Final Thoughts
My opinion is that Scholastic Corporation is deserving of a Hold rating. On one hand, SCHL’s shares are undervalued and the company has a $100 million repurchase program in place to uphold its stock price. On the other hand, Scholastic Corporation’s latest quarterly financial performance and its full-year outlook have fallen short of expectations.
