HMHC Houghton Mifflin Harcourt Company

Sector financial performance:

This company, who primarily provides K-12 educational content/material, solution and service for public and private schools, has been grouped into K-12 materials sector in education industry.

The decline in sales for those companies in this sector who focus on traditional instructional materials/assessment (k-12) seems to slow down in 2017, a trend that has continued in the past several years primarily due to less new adoption from state and local government. The trend seems to be continuing in 2018.  However, it seems that the demand for technology–based educational/learning solutions (k-12) has been increasingly strong as indicated by fast increase in revenue of companies who focus on this type of products during the same period of time.

Based on the extent of demand for their products, companies in this sector present different trends in terms of their margins. We saw an apparent decrease in gross margin (about 42.5% in 2018) for those companies who focus mainly on traditional educational materials and a significant increase in gross margin ( 70% in 2018) for companies who have been successfully shifting their products to technology solution. The average SG&A as percentage of sales of companies in this sector concentrates on a range of 45-47%. Generally, the typical operating margin for traditional solution companies ranges from -5% to 7% in 2018.

According to our analysis, the current companies’ enterprise price/sales ratio is between 1.3 and 3.9 with a debt/asset ratio of 30%. The current companies’ enterprise price/EBI ratio is between 36 and 39 with a debt/asset ratio of 30%.

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Company performance:

The pace of decline in sales of this company’s core instructional materials seems to be slowing down in the past several years as indicated its sales data. However, demand for its supplementary materials has been strong.

The first six months of 2018compared with same period of 2017(ended 20180630)

Sales decreased by about 3.2% primarily due to decrease in publishing segment and in core materials sales/adoption of states.

The 2017compared with 2016

Sales increased by about 2.5% primarily due to increase in publishing segment and education segment in extension business.

The first nine months of 2017compared with same period of 2016

Sales increased by about 1.4% primarily due to increase in publishing segment. Sales from its core educational materials/service were flat.

Year 2016 compared with 2015

Organic sales decreased by about 6% primarily due to the decrease in its supplemental business and assessment business.

Year 2015 compared with 2014

Organic sales decreased by about 8% primarily due to the decrease in its core instructional materials business.

Its gross margin (including publishing rights) went up by about 270 basis points to about 43% in 2017since 2014 primarily due to the decrease in amortization in publishing rights offset by increase in products costs due to sales mix. During the same time, its SG&A as percentage of sales has decreased as a result of deleverage of decreased sales and acquisition related expenses. And its operating margin up to -5% in the third quarter of 2017 (based on 12 months trailing data). In 2018, gross margin down a little to about 42.5% and with improved SG&A% its operating margin was improved slightly.

Stock price

This stock currently has a companies’ enterprise price/sales ratio of 1.3 ($7.7). We think that its stock is being relatively overvalued considering its relative high price/sales ratio and uncertainty in cutting costs to improve its margin.