PebbledsPicks (90.82)

August 2009: School Specialty Inc. (SCHS)

August 28, 2009 – Comments (0) | RELATED TICKERS: SCHS

School Specialty, Inc., an education company, provides supplemental educational products and equipment for the pre-kindergarten to twelfth grade market in the United States and Canada. It operates in two segments, Publishing and Educational Resources. The Publishing segment develops and publishes standards-based curriculum products, supplemental curriculum materials, instructional programs, and student assessment tools in the areas of science, reading, literacy, coordinated school health, and planning and student development. The Educational Resources segment offers everyday consumables and instructional materials. This segment offers products for administrators, such as classroom supplies, office products, janitorial and sanitation supplies, school equipment, technology products, and paper; products for educators, which include supplemental learning materials, teaching resources, upper-grade-level art supplies, physical education equipment, and classroom technology; and furniture products, such as classroom furniture, library furniture, cafeteria furniture, office furniture, and fixed furniture, such as bleachers and lockers. This segment also provides a suite of services to school administrators, which include supply chain management, back-to-school logistics, and construction management services. It offers its products through direct sales force, catalogs, and online. The company was founded in 1959 and is headquartered in Greenville, Wisconsin. School Specialty, Inc. operates independently of U.S. Office Products Company as of June 9, 1998.

Comments: OK, so I've got today and Monday to make a pick for August 2009. It's going to have to be today. I've done considerable research on VIRC, but that stock is too small (at the moment) to pick for CAPS, so I am going with a larger, more diversified competitor. As I mentioned in my last post, pegging the bottom every time is impossible. Investment success depends simply on selling at a higher price than one paid for a stock, right? The process of how one achieves success more times than failure is a matter of intense debate and difference in style and philosophy. My process here is an attempt at a consistent value approach (with a smattering of growth thrown in for good measure). SCHS is not simply a "value" or a "growth" stock.  Currently the stock is not a $0.50 dollar (that was a few months ago), but the stock is probably more like a $0.75 dollar based purely on historical P/E valuation.

School Specialty has grown revenues year in and year out for many years (except for the most recent year), and the stock is trading near the low to mid part of its historical P/E range, even after the near double from the March 2009 bottom. However, margins are slim. Goodwill is huge.  Debt is high. And the economy is in the tank. I should run from this stock as fast as I can. Right? But hold on. There have been a few not-inconsequential-insider purchases this year. Revenues have not fallen off a cliff and my recent research in this industry reveals that revenues tend to be fairly consistent, even when times are bad. This company is an industry leader.  From the April 2009 10-K:

In fiscal 2009, we believe we sold products to approximately 70% of the estimated 130,000 schools in the United States and we believe we reached a majority of the 3.8 million teachers in those schools.

That sounds like more than leadership to me; it sounds like domination. Simply, SS operates in a long-term growth niche. Sure, margins are low and the business is boring, but a stock should represent the present discounted value of all future cash flows. In the case of SS, which has a long history and a most probably lengthy future of stable cash flows, I believe SCHS is moderately undervalued here. Sure, the stock might pull back to $20, but I am betting that this stock, that was $35-ish before the crash, will see $30 and above within the next year at some point once the market realizes that, in the end, SS really is, after all, a stable long-term winner.