Acquisition And Dog Man Releases Will Expand Media Capabilities

Key Takeaways

• Investments in growth initiatives and strategic media acquisitions are poised to boost revenue and IP monetization on streaming platforms.
  
• Efficiency measures like cost savings and asset monetization could improve margins and enhance shareholder returns.
  
• External economic pressures and funding uncertainties are challenging revenue growth across Scholastic's segments, with impacts on margins and profitability.

Catalysts

Scholastic Corporation publishes and distributes children’s books worldwide.

• Scholastic's investment in growth initiatives, including the acquisition of 9 Story Media Group, is expected to enhance revenue through expanded media capabilities and IP monetization on streaming platforms.
  
• The company's strategic focus on successful frontlist titles, such as new releases in the Dog Man and Hunger Games series, is anticipated to drive further revenue growth and increase backlist sales.
  
• Cost-saving initiatives and strategic departmental reorganizations are implemented to improve net margins in the current fiscal year and fiscal 2026.
  
• The ongoing strategic review of the Education Solutions business aims to realign resources for optimized long-term growth and profitability, potentially increasing future earnings.
  
• Scholastic's emphasis on monetizing significant non-operating assets, such as owned real estate, could unlock liquidity for debt reduction and enhance shareholder returns, positively impacting net margins and EPS.

Scholastic Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Scholastic's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.2% today to 12.0% in 3 years time.
• Analysts expect earnings to reach $223.8 million (and earnings per share of $9.35) by about April 2028, up from $18.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 4.3x on those 2028 earnings, down from 22.7x today. This future PE is lower than the current PE for the US Media industry at 13.7x.
• Analysts expect the number of shares outstanding to decline by 5.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.67%, as per the Simply Wall St company report.

Scholastic Future Earnings Per Share Growth

Risks

• Scholastic is experiencing challenges in the Education Solutions segment, with a 16% decline in revenue due to decreased spending on supplemental curriculum products by schools and school districts, which negatively impacts operating margins and profitability.
  
• The company is facing external headwinds, including increased cautiousness in consumer spending on discretionary items like children's books and educational materials, which could impact revenue growth.
  
• Uncertainty in federal education funding and policies is causing schools to delay or pause purchases of instructional materials, impacting the revenue potential of Scholastic's education business.
  
• The Entertainment segment is affected by delayed production spending and green lights from major streaming platforms, which could impact revenue generation and operating income.
  
• Rising tariff costs and global trade policy uncertainties, particularly on non-book products sourced from countries like China, may increase product costs, potentially squeezing net margins if not mitigated by pricing strategies.

Valuation

• The analysts have a consensus price target of $35.0 for Scholastic based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.9 billion, earnings will come to $223.8 million, and it would be trading on a PE ratio of 4.3x, assuming you use a discount rate of 7.7%.
• Given the current share price of $15.84, the analyst price target of $35.0 is 54.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.