GET AN EDUCATION! (SCHL)

GET AN EDUCATION! (SCHL)

 

Everybody wants to write a book.  And it’s likely that everyone has a book that needs to be written.

 

Unfortunately, some people don’t have the skills or time to write a book.  Others, who do, may not be able to produce something that anyone wants to read.  That’s just the way the cookie bounces.

 

So it’s really a hairline, tightrope-walk to a project that actually makes it into print, gets purchased and produces a profit.

 

Not to mention anything of bestsellers.

 

And that brings us to the focus of our trade for the week – the publishing business.

It’s no secret that online publishers, foremost among them Amazon, have stolen a massive share of the book-selling market from traditional publishing houses.  Latest stats show that the company has an incomprehensible 40 percent market share of all new books sold and 64% of all printed books purchased online.

It’s also no wonder that Amazon’s ‘best-seller’ stats are far more reliable than those of the New York Times, which bases its numbers on a survey of independent book stores.

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Now, we know as well as the next guy that ‘best-seller’ doesn’t always translate into what we’d consider an enjoyable or even interesting read.  But the money flow speaks volumes.

 

Writers are just as willing today to publish via online services like Amazon’s as they are traditional publishing houses.  They don’t lose out in the least in terms of sales/marketing or distribution, and the per-copy profit to them is almost always superior.

 

And that has led to a number of interesting developments in the publishing business –

 

  • First, traditional publishers, whether they’re in the newspaper, magazine or book business, have been forced to move online to generate new revenues and stave off bankruptcy.

 

  • Second, new modes of reading, including Amazon’s Kindle and other ‘e-readers’, have pushed publishers to stream a large portion of their published material toward new formats and altogether innovative end products. Amazon reported over six years ago that it sells more digital e-books than paper books!

 

  • And that, in turn, has affected the retail book industry formidably. New online marketing and sales platforms mean traditional book buying outlets are going the way of the dinosaur.  Sure, big box booksellers, like Barnes and Noble (NYSE:BNS), are still around, but for the most part, the little guys have all closed shop – unless they inhabit a lucrative niche, like antiquarian or used.

 

There is, however, one segment of the book business that, until now, has remained as strong as ever.  It’s a corner of the publishing world that operates almost exclusively with real books with real paper and covers and that sells its product, in the main, via bricks and mortar booksellers.

 

It’s the educational segment of the market, and as we see it, it stands to resist all comers from the tech world so long as children, youth and even university students are in need of, and prefer to learn from texts and workbooks that they can dog-ear and scribble in.

 

Profitability Plus

 

But more than that.  It turns out the educational book publishing business is an absolute gold mine.  The price of education, in general, has risen precipitously – and the loans that students have taken on to pay for it are staggering.  But educational books, too, have seen an extraordinary rise in price.  Have a look –

The price of college texts has soared faster and higher over the last two decades than all CPI items combined, while the price of books for regular readers has declined!

 

And failing a complete collapse in the current education paradigm, or a serious economic depression that turns students into the workforce at an earlier age, we don’t see any reason for the educational money-printing spigot to be closed.

 

Drilling Down to the Powerhouses

 

That said, a change is in the air.  A number of online services have begun to challenge the university segment of the business by offering used or even free resources to cash-strapped students in need of course material.

 

Companies like Chegg Inc. (NYSE:CHGG) and Boundless.com, for instance, are making many old-time university text publishers quake in their search for new revenues, or, as happened in the case of Houghton Mifflin Harcourt (NYSE:HMH) and McGraw Hill Financial, sell off their college textbook assets altogether.

 

It’s our considered opinion, that the jig is up for nearly all but those who focus on the K-12 market, and that leaves one outstanding player in the game – Scholastic Corp. (NASDAQ:SCHL).

 

The company is the largest publisher of children’s books in the world, producing not only recreational reading material, but educational textbooks and workbooks, as well as a broad range of teaching-related resources.

 

They generate on the order of $1.7 billion in annual revenue, carry a market cap of $1.3 billion (representing a price/sales ratio that we love), sport an annual dividend yield of 1.7%, while price to book is just 1.06 (against an industry reading of 2.47).  The company’s P/E is an outrageously bloated of 48.5.

 

As to that last figure, all the major book publishers possess multiples north of 35.  It’s a fact that we can’t ignore, nor can we say that it leaves us sanguine.  But in this case, we have reason to believe the picture is still bright.

 

Have a look at the weekly chart, below –

Most noteworthy here are –

 

  • price action, presenting a multi-year pattern of higher highs and higher lows (in red), and
  • the bounce off the weekly, long term, yellow moving average (blue arrow), the first such occurrence of its kind in four years!

 

The latter item speaks, in our opinion, to a healthy outlook for the shares.  And as the bounce occurred just seven weeks ago, we’re encouraged that the stock remains cheap and is ready to re-ascend toward its former highs in the $49 range.

 

And to that end, we’re playing it as follows –

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Many happy returns,

 

Matt McAbby

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