Book publisher Houghton Mifflin’s (HMHC, Financial) shares are down substantially. Wall Street is concerned about school districts buying new books. It could be a good time to buy shares.
The company has 122.28 million shares, the stock trades at $13.39 and the market cap is $1.64 billion. Diluted earnings per share (according to Yahoo) is a loss of $1.25. There is no dividend. So we can’t value by price to earnings ratio nor dividend yield. That’s ok, there are other ways to value stocks.
Revenues were $1.378 billion in 2013, $1.372 billion in 2014 and $1.416 billion in 2015. Houghton Mifflin has lost $110 million to $130 million over the last three years. Free cash flow for the last four quarters is $206.5 million. Thus, the free cash flow yield is 12.7%. Ah, now we’re getting somewhere. I can see why these value funds are shareholders.
Cash is $98 million and accounts receivables $347 million. The liability side shows $250.5 million in accounts payables, $8 million in short-term debt and $767 million in long-term debt. I like this balance sheet, very strong. And that’s not counting inventory, which I usually exclude. Moody’s downgraded the debt to B2 because it’s leery of share buybacks. I think Moody’s is being harsh.
Houghton Mifflin publishes children’s books, novels, cook books, Cliff Notes and, of course, school books. Some better known titles include: "Curious George," "Lord of the Rings," "Betty Crocker," "Silent Spring," "The Little Prince" and thousands more. Of course, many of these titles can be read on Amazon and Kindle.
In the latest half year, sales were up 10% to $598 million on higher EdTech (an acquisition) sales, which offset less revenues in the new adoption market (new adoption means school districts buying books). Adjusted Ebitda was up 23% to $34 million. Their free cash flow numbers and mine came out differently. I was using cash flow from operations minus capital expenditures. Sales guidance came in at $1.485 billion to $1.555 billion for 2016. If that happens, the revenue numbers will be quite nice.
A few weeks ago, CEO Linda Zecher stepped down and Gordon Crovitz filled her shoes. Crovitz was the publisher at the Wall Street Journal. There has been a share buyback in place, which is unfortunate. The shares that Houghton Mifflin has been buying back were at a much higher price. That’s why I’m leery of buybacks.
This Barron’s article is a must read. An Oppenheimer analyst thinks that digital sales could 70%. The analyst also thinks the stock could produce $3.50 in free cash flow a share. When the article came out in January, the stock was $17.50. The bulls are banking on the idea that school book sales are cyclical and think that there will be an upturn in 2017 and 2018. In a subsequent article, Barron’s quoted a Morgan Stanley analyst who thinks Houghton Mifflin will earn in free cash flow, "to $1.63, in 2017 and 45%, to $2.36, in 2018” a share. Lots of bulls and the stock is down from when both of these articles were written.
The company came out of bankruptcy just four years ago. It was high debt amounts put on by Irish banker Barry O’Callaghan that caused the company’s demise. The debt holders became equity holders as is the case in bankruptcies. An article by Holly LaFon of GuruFocus relates Baron Funds' view on the company. Baron thinks that the school book adoption by the state of California has hurt shares. Another article discusses how FPA bought shares. FPA also noted the adoption issue and that shares are undervalued.
So the stock is down a lot. Before buying shares, I would want to speak to people in the school districts and see if they like Houghton Mifflin. See what their thoughts are and if districts have the money to buy books. On a side note, I have a friend who teaches high school English. He said that his books are quite old but the town can gather the money to build million dollar football stadiums. Could portend good things for book sales, one would hope.
Disclosure: We do not own shares.
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