Jeff Mathews' Appointment Will Lead To Improved Operational Efficiencies

Key Takeaways

• Strategic focus on growth through acquisitions and the appointment of Jeff Mathews signifies a targeted approach to enhancing future revenue and net margins.
  
• Scholastic's investment in core businesses and capital allocation for shareholder value points to long-term revenue growth and improved operational efficiencies.
  
• Scholastic's financial stability is threatened by consumer spending pressures, shifts in educational spending, strategic realignments, competitive challenges, and increased financial leverage.

Catalysts

Scholastic Corporation publishes and distributes children’s books worldwide.

• The appointment of Jeff Mathews as Chief Growth Officer to refine and implement Scholastic’s long-term growth strategy, alongside his experience in strategy, M&A, and investor relations, indicates a strategic focus on growth and capital allocation that could positively impact future revenue and net margins.
  
• The acquisition of 9 Story Media Group and its subsequent contribution to revenue and EBITDA in Q1 suggests Scholastic's growth through strategic acquisitions, which is likely to continue impacting both top-line growth and earnings positively.
  
• Continued investments in Scholastic’s core businesses, particularly in the Children’s Books and Education sectors, with a focus on long-term growth initiatives, are expected to drive future revenue growth and improve operational efficiencies.
  
• Scholastic's focus on capital allocation priorities, including investing in compelling growth opportunities and returning capital to shareholders, could underpin the potential for enhanced shareholder value and improvements in earnings per share.
  
• The development and implementation of new strategies in the School Reading Events business, specifically the transition of Book Clubs to a more profitable core business, indicates a strategic approach to revitalizing key channels that could lead to increased revenue and higher net margins in the long term.

Assumptions

• Analysts are assuming Scholastic's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.5% today to 5.2% in 3 years time.
• Analysts expect earnings to reach $95.2 million (and earnings per share of $4.51) by about December 2027, up from $23.8 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 11.9x on those 2027 earnings, down from 29.9x today. This future PE is lower than the current PE for the US Media industry at 14.7x.
• Analysts expect the number of shares outstanding to decline by 9.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.04%, as per the Simply Wall St company report.

Risks

• Pressure on consumer spending could impact the performance of Scholastic's fairs business, potentially reducing revenue per fair and affecting overall profitability.
  
• Lower spending on supplemental curriculum products by school districts, focusing instead on adopting new core programs, may depress sales in the Education Solutions segment, impacting revenue.
  
• The strategic transition of Book Clubs to a smaller, more focused operation may not revitalize the channel as expected, potentially limiting revenue growth from this segment.
  
• Increased competition and the challenge of engaging young readers amidst a plethora of digital entertainment options could affect Trade Publishing's performance, impacting revenue and market share.
  
• The acquisition of 9 Story Media Group and the associated increase in net debt position Scholastic for higher financial leverage, potentially affecting its financial flexibility and increasing the cost of capital.

Valuation

• The analysts have a consensus price target of $44.0 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 2027, revenues will be $1.8 billion, earnings will come to $95.2 million, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 7.0%.
• Given the current share price of $25.26, the analyst's price target of $44.0 is 42.6% 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.