Scholastic has had an impressive run over the past six months as its shares have beaten the S&P 500 by 9.5%. The stock now trades at $41.58, marking a 22.7% gain. 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? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Scholastic Will Underperform?
Despite the momentum, we’re passing on Scholastic for now. Here are three reasons why there are better opportunities than SCHL, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Scholastic’s 4% annualized revenue growth over the last five years was weak. This was below our standard for the consumer discretionary sector.
2. Cash Flow Margin Set to Decline
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.
Over the next year, analysts predict Scholastic’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 27.6% for the last 12 months will decrease to 1.9%.
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).
Unfortunately, Scholastic’s ROIC has decreased 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 see the value of companies helping consumers, but in the case of Scholastic, we’re out. With its shares beating the market recently, the stock trades at 24.3× forward P/E (or $41.58 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better investments elsewhere. We’d suggest looking at the Amazon and PayPal of Latin America.
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