Is Scholastic Corporation’s Stock a Undervalued Find in Education?

Scholastic Corporation, a familiar figure in the world of children’s education and entertainment, recently unveiled its Q2 2025 earnings report, shedding light on the company’s efforts to navigate challenges while strategizing for recovery. The company’s stock has taken a significant hit, plummeting by 38% over the past year, sparking discussions among investors about potential opportunities for those eyeing a resurgence in educational markets.

The Q2 earnings report detailed a few setbacks, with revenue clocking in at $544.6 million, marking a 3% downturn compared to the previous year. The decline was attributed to timing delays in the Children’s Book Publishing and Distribution segment and a notable 12% drop in Education Solutions revenue. Operating income also saw a decrease of 26% to $74.7 million, while adjusted EBITDA only slipped by 12% to $108.7 million, indicating the company’s ability to maintain its margins. Despite these challenges, Scholastic remained steadfast in its full-year guidance, pinning hopes on upcoming blockbuster releases like Dog Man: Big Jim Begins and The Hunger Games: Sunrise on the Reaping, scheduled for release in March 2025.

The Education Solutions segment faced difficulties, resulting in an operating loss of $0.5 million, reflecting a broader industry trend towards core curriculum adoptions that may take time to reverse. However, the acquisition of 9 Story Media Group, despite contributing to Entertainment’s $4.7 million operating loss, puts Scholastic in a favorable position to leverage digital-first content and global streaming platforms.

In terms of valuation, Scholastic exhibits potential for investors seeking a bargain, trading at a price-to-sales ratio of 0.61, significantly below its five-year average of 0.83 and compared to peers like Houghton Mifflin Harcourt, which boasts a P/S ratio of 0.89. Considered in isolation, Scholastic’s P/E ratio of 37.95 looks elevated, mainly due to volatile earnings, with diluted EPS plunging by 30% to $1.71 while adjusted EPS stood at $1.82. The enticing dividend yield of 3.7% adds to its allure, even though the high payout ratio of 122% raises concerns regarding the sustainability of dividends unless earnings bounce back.

Despite its share value plummeting by 38% this year, reflecting near-term risks such as $409.5 million in debt, the company’s financial indicators paint a more nuanced picture. Scholastic maintains $42.4 million in free cash flow, even after witnessing a 52% year-over-year decline, while a $400 million credit facility provides a cushion of liquidity.

Scholastic’s undervaluation in terms of revenue multiples, combined with its established franchises and commitment to shareholder returns through dividends and buybacks, positions it as an appealing investment opportunity. The integration of 9 Story Media Group could unlock new possibilities, enabling Scholastic to expand its digital content library and tap into popular streaming platforms like Disney+ and Netflix.

However, potential risks linger on the horizon, such as the prolonged recovery of the Education Solutions segment, the pressure on operating margins, and challenges related to debt management. Investors eyeing Scholastic should approach their investment with caution, considering the company’s strengths in children’s publishing, intellectual property assets, and extensive global distribution network.

To mitigate short-term volatility, investors can contemplate purchasing SCHL at its current levels, with a target price range of $27 to $30 by early 2026, anticipating improvements in margins and robust sales from its 2025 book lineup. Monitoring the stock closely and setting a stop-loss below $18 could serve as a safeguard against prolonged underperformance.

In a market that craves value, Scholastic emerges as a compelling choice for contrarian investors, blending undervalued assets with promising growth prospects, albeit with a degree of inherent risk. A data-driven assessment akin to the methodology of Andrew Ross Sorkin would suggest a balanced approach, weighing the optimistic aspects of an investment alongside cautious considerations.