Todd Bunton

Bear of the Day: Scholastic Corp (SCHL)

by

April 09, 2013 |

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Earnings estimates have fallen sharply for Scholastic Corporation (SCHL - Snapshot Report) following disappointing fiscal 2013 third quarter results and lower management guidance. It is a Zacks Rank #5 (Strong Sell) stock.

Although shares have sold off since the Q3 report making valuation look a bit more attractive, investors may want to hold off on this stock until earnings momentum improves.

Scholastic Corp is the world's largest publisher and distributor of children's books.

Big Q3 Earnings Miss

Scholastic Corp delivered disappointing results for the third quarter of its fiscal 2013 on March 21. The company reported a loss of -63 per share, which was well below the Zacks Consensus Estimate of -39 cents. It was also well below last year's loss of -32 cents.

Sales slid -19% to $380.5 million, missing the consensus of $384.0 million. It was the company's 3rd straight top-line miss. This quarter's decline was driven mostly by the "Children's Book Publishing & Distribution" segment, which saw sales plunge -30% due to a sharp drop in sales of The Hunger Games trilogy.

Estimates Falling

Management lowered its guidance for the remainder of 2013 following disappointing Q3 results, prompting analysts to revise their estimates significantly lower for both 2013 and 2014. This sent the stock to a Zacks Rank #5 (Strong Sell).

The Zacks Consensus Estimate for 2013 is now $1.09, down from $1.53 just 30 days ago. The 2014 consensus has fallen from $2.35 to $2.20 over the same period.

You can see the big decline in earnings estimates over the last several months in the company's 'Price & Consensus' chart:

Scholastic also carries a long-term 'Underperform' Zacks Recommendation.

Valuation

Shares of SCHL are down about -15% since the Q3 earnings release, brining valuation down with it. The stock currently trades at 13x 12-month forward earnings, which is in-line with the industry median. But investors may want to wait to establish a position in the stock until earnings momentum turns around.

The Bottom Line

While investors might want to avoid Scholastic Corp for now, there are other stocks within the 'Publishing-Books' industry that investors might want to consider based on their positive earnings momentum. John Wiley & Sons (JW.A - Snapshot Report) and Reed Elsevier , for instance, both carry a Zacks Rank of 2 (Buy).

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.

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