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Scholastic Foresees Strong Year

Perhaps fearing a repeat of the bursting bubble that drove shares of children's book and educational materials publisher Scholastic Corp. (Nasdaq: SCHL) toward the ground in 1997, investors have driven the company's stock downward to start the year, creating a 12-month stock chart reminiscent of Harry Potter diving for the golden snitch.

As witches fall, though, so do they rise -- and it was largely because of teenage spellcaster-in-training and star Quidditch chaser Potter and his enchantment of the nation's book-buying public both young and old (Scholastic only owns U.S. publishing rights) that the company enjoyed such a lively run-up to end the 1990s. Now the company wants to get back on its broom, so to speak.

"There are no corporate developments to account for the recent drop in [our] share price," Scholastic said in a press release today, "and... the company expects to meet or exceed consensus analyst estimates for both the [fiscal] third quarter ending February 29... and the full fiscal year ending May 31." First Call's five-analyst consensus estimates for Q3 and Q4 were $0.06 and $1.66, respectively.

Continued strong sales at its core children's book publishing and distribution segment -- it has accounted for about 70% of sales through the first six months of the fiscal year ended Nov. 30 -- and return levels within expectations are expected to drive the results.

Scholastic is careful to report return levels because of the flap in 1997, when the company was forced to deal with unusually high levels of returns when the retail market became saturated with its Goosebumps and other books. Gung-ho growth investors were surprised to hear that a loss was forthcoming and some of the angrier ones took the company to court, alleging Scholastic knew of the sales weakness and hid the information from them. A U.S. district court judge dismissed the suit for the second time late last month.

When a company bases so much of its growth on high-momentum products -- Scholastic also publishes books based on the exploits of faddish Pokémon and plans to "novelize" the movie The Sixth Sense as well -- investors often turn at the slightest sign of weakness. And with the fourth book in the Harry Potter series not expected until the summer, generally not a great time to sell books to kids for obvious reasons, a downturn of some kind should be expected.

Chairman and CEO Richard Robinson tried to address the new expectations the Potter franchise has brought the company courtesy of the investing masses in a mid-December CNBC interview: Though for the current fiscal year the company believes earnings growth could near 40%, he directed investors to look for numbers closer to 20% for the next five years.

"Pokémon is still very, very hot, and books are selling extremely well to children of all ages," Robinson said on CNBC, but "we're not counting on Pokémon being a long-term product the way Harry Potter is. Harry Potter is a classic, a hardback of high literary quality. Pokémon, we realize, is popular for now.... We're going to sell it as long as they want to buy it."

With that in mind, and the company trading for about 17x projected full-fiscal-year earnings even after a slight rise this morning, investors may want to consider Scholastic for further reading, though a balance sheet long on debt and light on cash bears watching when the company reports its next few sets of financial results.

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