market folly

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Michael Karsch of Hunter Peak Investments.  He pitched a long of Houghton Harcourt.


Michael Karsch's Sohn London Presentation 2015

Long Houghton Harcourt (NAS: HMHC) 

Houghton Harcourt is primarily a school text book publisher. It dominates in books for reading, maths and science. Houghton is the largest developer of text book content from Kindergarten to 12th grade in the US. It has 40% market share of the overall spend in the US. The school publishing market is an oligopoly. HMHC is a well-established company that has been trading for over 100 years. HMHC stock currently trades with a beta < 1.

HMHC went through bankruptcy in 2007 after an LBO and a second private equity owner encouraged it to take on too much leverage.  Houghton re-emerged from bankruptcy about a year ago and has been significantly de-levered.

Text books are a good business as revenues are fairly stable. There is a never ending stream of children entering the education system that need to be educated. It costs about $10,000 to educate a student in the US - approximately $100 per year comes from text books.

Houghton is not vulnerable to digital disruption – 40% of their orders are already for digital products. The text book market should not be compared with newspapers in this respect. Houghton has not lost margins from the move to digital. News Corp tried to break into the school digital market by giving away tablets but failed and had to write off the costs. There may actually be benefits from the digital revolution.  For example, print cost savings.

Houghton has complex accounting partly because revenues from textbooks are spread over 7 years even though the fee for the books is received up front. It’s a lumpy business that is hard to predict quarter by quarter. In the last two quarters Houghton has missed earnings expectations. Only 4 analysts following the stock. The earnings disappointments’ have provided a good entry point. Expect the company to buyback 20% of the shares in the next 12 months.

Be sure to check out the rest of the Sohn London Conference presentations.