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Favorite Stock: Scholastic
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February 19, 2002: 12:36 p.m. ET
Glovsky: Publisher of Harry Potter books leads in classroom education.
By Staff Writer Meghan Collins
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NEW YORK (CNN/Money) - The success of Harry Potter, including the boy's cult-like following, has some wondering if anything else exists in the children's literary world anymore.
The publisher of the first four books in the series, Scholastic, is flying high, but there's more to come beyond its possible deal for the fifth book, said Charles Glovsky, manager of the Independence Small Cap fund.
The Harry Potter children's book series made readers out of kids and adults worldwide. Its reach was boosted even further with the release of the film version of "Harry Potter and the Sorcerer's Stone," the original novel, last November; the film was released by Warner Bros., a unit of CNN/Money parent AOL Time Warner. This month, the number of Harry Potter books in print hit 65 million.
While Scholastic won with Harry Potter, the company has also found continued success in publishing and distributing books and software through classroom programs and book fairs, Glovsky said.
Shares of Scholastic (SCHL: down $0.17 to $49.41, Research, Estimates) are trading in a 52-week range between $52.27 and $34.12.
Glovsky explained in greater detail why Scholastic is his favorite stock:
What draws you to this stock? What do investors need to know about it?
Scholastic has built a strong franchise with elementary students, parents, and teachers. It is the leader in book clubs and fairs. It publishes magazines and books for the K-12 market, including the Harry Potter series, Clifford the Big Red Dog, Scooby Doo, Captain Underpants, I Spy and Star Wars. Investors should recognize that there is much more to this company than just its association with Harry Potter.
Why will it continue to do well? What do you attribute it to?
The stock has been doing well because the company has been beating earnings estimates even in the absence of a new Harry Potter book. This has been accomplished through gains in the club and fair markets, effective cost cutting, and some help from the November 2001 release of the "Harry Potter and the Sorcerer's Stone" film.
Are there any risks unique to the stock?
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Charles Glovsky | |
Scholastic published the first four books in the Harry Potter series. While it may have an edge in obtaining the rights to the fifth book, due out this summer, there is no guarantee that it will, in fact, be awarded those rights.
What other companies are a threat? What type and how much?
There is little direct competition in the club and fair businesses. The biggest threat to Scholastic's outlook is failure to execute in terms of continuing to grow revenues from those sources, obtaining attractive new titles, deriving savings from expense containment, and, again, getting the publishing rights to additional Harry Potter novels.
What growth prospects do you expect over the next 12 months?
In the year ended May 31, 2001, Scholastic earned $2.24 per share. In the current and next fiscal years, we expect earnings of $2.50 and $3.00, respectively. With the stock now selling at around $50, we believe we'll see a much higher price over the next 12 to 18 months.
What are the potential negatives to investors buying it now?
There is some concern that one-time factors have helped recent earnings results. While some of these issues may be valid, we are enthusiastic about the stock because of the company's ongoing earnings and cash flow prospects.
What is your financial interest in the stock? Do you or you company own it?
It is one of the largest holdings in the Independence Small Cap fund. I do not own the stock directly, but I do have a significant investment in the fund. 
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