School Specialty (SCHS)

School Specialty's (SCHS - Analyst Report) fiscal fourth quarter sales came in as expected, but the company's earnings easily beat our estimate thanks to strong cost-cutting efforts. The company did not provide specific guidance for fiscal year 2010, citing delays in the passage of state and school budgets.

SCHS is highly dependent on state and local governments for its revenues, and many of those governments are dealing with falling tax receipts and rising budget deficits. The federal government's stimulus package should help, but there is no guarantee that those funds find their way into education.

As such, School Specialty's revenue could come in below even our pessimistic forecasts. We would continue to avoid SCHS shares because the company's future results will not be due to the execution of its business model -- they will be determined by decisions made by state and local governments. Trying to game spending by state and local governments is not a prudent investment strategy.