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Did Scholastic Deserve That Punishment?

Children's book publisher Scholastic (SCHL) is getting poor marks on the Street. Its fiscal fourth-quarter profits came in below consensus forecasts, and only two of the eight analysts who follow it now rate it a "buy." But one bull, Ivan Feinseth of Matrix Investment Research, says Scholastic, now at 30.10, has an intrinsic value in the mid-to-high 30s. Michael Metz of Oppenheimer (OPY) says Scholastic is so undervalued that it "keeps showing up in our screens of buyout candidates." He thinks it's worth 40 in a sale to private equity players, who would be drawn to its assets and cash flow. In the 12 months through mid-2006, notes Feinseth, Scholastic's free cash flow has shot up from $7 million to $200 million, while excess cash per share jumped from $1.55 to $3.75. Drew Crum of Stifel Nicolaus, who also pegs it a "buy," says 2007 will be a better year for textbook sales. Also, sales of $195 million worth of Harry Potter books should add 60 cents to 2006 earnings, figures Crum. He calls the stock "compelling" and sees earnings of $1.65 for the year ending May, 2007, rising to $2.35 in fiscal 2008, vs. $1.69 this year.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial

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