The past six months have been a windfall for Scholastic’s shareholders. The company’s stock price has jumped 46.9%, hitting $27.69 per share. This performance may have investors wondering how to approach the situation.
Is now the time to buy Scholastic, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.
Why Do We Think Scholastic Will Underperform?
Despite the momentum, we're sitting this one out for now. Here are three reasons there are better opportunities than SCHL and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Scholastic’s 1.9% annualized revenue growth over the last five years was weak. This fell short of our benchmarks.
2. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Scholastic historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 5.2%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Scholastic’s ROIC averaged 4.6 percentage point decreases over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Scholastic, we’ll be cheering from the sidelines. After the recent rally, the stock trades at 18× forward P/E (or $27.69 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
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