Less Gov't Spending for SCHS

We maintain our Hold rating on School Specialty, Inc. (SCHS - Analyst Report) The company’s industry-leading market position and cost-cutting efforts are offset by growing competitive pressures and limited organic growth prospects. We are reducing our earnings estimate to $2.30 from $2.38 per share for 2009 and issuing our fiscal 2010 EPS estimate of $2.45.

School Specialty owns the largest share of the highly fragmented $7 billion supplemental educational resources market. Several of the company’s brands are leaders in their respective markets. However, reduced government spending, increasing competition, and risks to the company’s restructuring plan offset the positives.

School Specialty relies on state and local government spending for its revenue. Given problems in the housing sector, we expect government tax receipts to decline. This will results in tighter government budgets or higher taxes. We don’t believe economic conditions will allow state and local governments to raise taxes. Thus, spending will fall.

SCHS shares are currently trading at 13.5x our fiscal year 2009 EPS estimate and 12.7x our fiscal year 2010 EPS estimate. School Specialty shares typically trade at a P/E in the mid-teens, so its current valuation is reasonable. As such, we expect it to trade in line with the S&P 500 over the next six months. Our target price is $33, or about 14x our fiscal year 2009 EPS estimate.

Read the full analyst report on SCHS