Scholastic has been on fire lately. In the past six months alone, the company’s stock price has rocketed 41%, reaching $34.95 per share. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Scholastic, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Scholastic Will Underperform?
We’re happy investors have made money, but we don't have much confidence in Scholastic. 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. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, Scholastic’s 4.9% annualized revenue growth over the last five years was weak. This fell short of our benchmark for the consumer discretionary sector.
2. Breakeven Free Cash Flow 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 broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.
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 is what often surprises the market and moves the stock price. 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
Scholastic doesn’t pass our quality test. Following the recent surge, the stock trades at 24.1× forward P/E (or $34.95 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now. Let us point you toward one of our top digital advertising picks.
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