What a fantastic six months it’s been for Scholastic. Shares of the company have skyrocketed 48%, hitting $42.41. This run-up might have investors contemplating their next move.
Is there a buying opportunity in Scholastic, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Scholastic Will Underperform?
We’re happy investors have made money, but we’re cautious about Scholastic. Here are three reasons we avoid SCHL, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Scholastic grew its sales at a weak 6.4% compounded annual growth rate. This fell short of our benchmark for the consumer discretionary sector.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Scholastic has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 13.9%, below what we’d expect for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
Over the last few years, Scholastic’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Scholastic falls short of our quality standards. After the recent rally, the stock trades at 21.1× forward P/E (or $42.41 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are superior stocks to buy right now. We’d suggest looking at the most dominant software business in the world.
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