Why Should You Add This Stock to Your Watchlist?

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When I was young, I used to read books published by Scholastic (NAS: SCHL) and recommend them to my friends, too. However, as an analyst I see very few reasons to recommend this stock, especially considering the inconsistent results it has produced. The company slipped to a loss in the just-ended quarter but saw its shares jump some 7% since the decline wasn't as much as the Street expected.

Let's take a look at how the year ahead may unfold for Scholastic.

The quarter on the table
Scholastic saw its revenues jump 9.5% from the year-ago quarter to $318 million on the back of impressive sales of READ 180 Next Generation, a reading program designed to support students and teachers. An 18% rise in sales from this segment came in handy for the company to beat estimates. E-books, of course, are the in thing nowadays, and with companies like Amazon (NAS: AMZN) (through its Kindle series) continually innovating in this arena, it calls for some food for thought for traditional publishers if they wish to survive.

Scholastic seems to have implemented some good cost control measures as it improved its operating margins. The company managed to control its pre-publication costs along with selling, general, and administrative expenses, which helped the company narrow its net loss to $27 million from $35 million a year ago.

The pages ahead
Scholastic released the latest version of READ 180 in May and got a positive response from users, with 20% of the schools already having upgraded to it. Once the schools reopen after vacation, this figure is expected to rise even further and generate more revenue for the company through upgrades.

As far as its pipeline of books is concerned, Scholastic has a range of titles up its sleeve, including Wonderstruck by Brian Selznick and The Scorpio Races by Maggie Stiefvater. The company also expects that the much-anticipated movie adaptations of the company's novels like War Horse and The Hunger Games will help it to post better results in the coming quarters. Scholastic will launch its e-book business in early 2012, along with a free and easily downloadable e-reading application. This will hopefully let tech-savvy children access their favorite books in an interactive format on Apple's (NAS: AAPL) iPad or Motorola's (NYS: MMI) Xoom, allowing Scholastic to pump up its business going forward.

The Foolish takeaway
Readers are continuously passing on buying conventional books and instead reading online. Scholastic has acknowledged this and is pushing for growth opportunities through e-books. But these measures might take some time to bear fruit, so I recommend you keep an eye on Scholastic by adding it to your Foolish watchlist by clicking here. Who knows when this publisher might turn out to be a fairy tale for us adults!

At the time this article was published Fool contributor Harsh Chauhan doesn't own any shares in the companies mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple and Amazon.com; and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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