Activision Blizzard, Inc. (ATVI), Scholastic Corp (SCHL): Victim of Unrealistic Expectations?

In addition, Disney has attempted to deal with this issue using a well-known technique employed by large conglomerates throughout history – diversification. How do you guard against the loss of a particular hit series? Have multiple hit series in play at any given time. It’s probably not much of a stretch to say that smoothing out earnings and cash flow, as well as hedging against the potential deterioration of any one franchise, was at least part of the motivation behind the acquisitions of Pixar Animation Studios, Marvel, and LucasFilm Ltd.

Implications for value

Would this approach work for Scholastic Corp (NASDAQ:SCHL)? Maybe. But there are also risks associated with more production. You certainly don’t want to end up in a situation where the substantial financial rewards that come with the occasional breakout series aren’t doing anything more than offsetting the losses from the large number of mediocre books you are putting out each year.

In any case, one thing we can take away from Scholastic Corp (NASDAQ:SCHL)’s recent quarter is the need to be careful and realistic when projecting out future cash flows and earnings for purposes of valuation. If you are making future sales projections based on past sales, you have to carefully consider whether past sales are sustainable. If the past period you are looking at includes, as with Scholastic, sales of a hit product, they may not be, and you may find yourself unpleasantly surprised when sales revert to sustainable levels.

On the plus side, Scholastic Corp (NASDAQ:SCHL) has demonstrated an ability to identify previously obscure authors and successfully bring their work to a mass market that includes adult readers, not just the children’s audience at which the books are aimed. If you believe the company can continue to do this in the future, then the recent drop in stock price following from this “surprise” sales decline may be a fine buying opportunity.

The article Scholastic – Victim of Unrealistic Expectations? originally appeared on Fool.com and is written by Toby Bordelon.

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