Houghton Mifflin Harcourt Company (HMHC, Financial), a leading publisher of educational materials and solutions for K-12 schools, fell in the quarter over concerns about the pace of near-term growth. California appears to be stretching out the adoption of a new reading program, which will negatively impact company bookings and revenues this year. There are also some concerns about the market share the company will garner from this and other adoptions. We still believe that the company is on the cusp of significant growth in “post-plate” cash EBITDA, the metric of most import when valuing the business. We believe this will be driven by overall industry growth, the company maintaining its 40% market share of new orders, and the realization of much higher margins as the business gains scale and transforms from analog/print to digital/subscription. We believe the stock can increase multiple-fold if this plays out as we foresee, so we deem it worth the wait.
From Baron Funds' Small Cap Fund second quarter 2016 shareholder letter.
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