Should You Bet on a New Day at Publisher Houghton Mifflin Harcourt?

After a quick bankruptcy, publisher Houghton Mifflin Harcourt is back in the public markets with a renewed focus on education. Should investors take a bite?

Jan 14, 2014 at 2:01PM

Publisher Houghton Mifflin Harcourt (NASDAQ:HMHC) has had a decent reception in its return to the public markets, with a solid gain since its November 2013 initial public offering. The company was a victim of the changes sweeping the book-publishing business, including a shift to digital distribution delivered via e-readers and tablets, which has generally led to lower product pricing and profit compression for publishers. 

After a trip through bankruptcy court in 2012, Houghton Mifflin Harcourt has reemerged more focused and lighter, having rid itself of close to $3 billion in debt. So, is it a worthwhile play for investors?

What's the value?
While Houghton Mifflin Harcourt owns a niche trade-publishing business, with rights to strong sellers like The Lord of the Rings and the Curious George children's series, it gets roughly 88% of its revenue from the education sector, thanks to its 2007 purchase of major supplier Harcourt Education Group. 

Despite intermittent funding challenges, education is a stable business, generating $30 billion in domestic sales for product and services suppliers in 2011, according to the Department of Education. It is also expected to grow over the long term, as U.S. student enrollments are projected to hit 58 million in 2021 compared to 55 million in 2010.

In fiscal year 2013, Houghton Mifflin Harcourt finally found some top-line growth, with revenue up 7.6%, reversing course from a four-year string of annual declines. The company benefited from big education-contract wins in key high-population markets, like Florida and New York, while also gaining from selective acquisitions in its trade-publishing arm, especially in the always-popular cookbook area. 

More important, Houghton Mifflin Harcourt's adjusted profitability continued to improve slightly, primarily due to its ongoing cost-savings plans that have cut significant fat from its sales and marketing workforce.

On the downside, though, Houghton Mifflin Harcourt's cash flow generation remains weak and is currently unable to fund the heavy, up-front capital expenditures necessary to create content for its education and trade-publishing segments.  In addition, the company's primary focus on the K-12 education sector is a bit risky, putting pressure on it to win contracts in key school districts, especially in so-called adoption states, like California, Texas, and Florida, where local school districts' purchasing activities follow the directives of the state school board.

A better way to go
As such, investors may want to look for an industry player with a more diversified business mix in education, like Pearson (NYSE:PSO).  While the company has a major position in the global K-12 education sector, Pearson also has built a strong franchise in the higher-education sector, including its eCollege unit that partners with colleges to provide online-course capabilities. 

Unlike Houghton Mifflin Harcourt, Pearson maintains a solid balance sheet that allows it to take advantage of opportunities, evidenced by its purchase of EmbanetCompass in late 2012 for $650 million, a transaction that increased its capabilities as a services partner to online graduate-program providers.

In FY 2013, Pearson has managed to generate top-line growth, up roughly 4%, though its results were negatively affected by a continued shift away from physical textbook sales. The company's business diversification efforts continue to pay dividends, though, as its MyLab online learning assistance and assessment unit reported rising registrations, ending the period with nearly 10 million users. Pearson also benefited from continued growth in other areas of its empire, including at its FT Group unit, publisher of the Financial Times and The Economist, where its paid subscriber base rose to a record 629,000, up 5%.

Pearson's greatest strength, though, may be its ability to engage in continuous process-improvement initiatives in response to a changing industry environment. The process sometimes forges unexpected results, including a surprising late 2012 investment in bookstore chain Barnes & Noble's struggling Nook Media unit. 

Despite a digital-content library of roughly 3 million books, Nook has been unable to beat back the dominance of Apple's iPad and Amazon's Kindle franchises in the tablet and e-reader categories, respectively, resulting in declines in device and content sales during the current fiscal year. However, Pearson likely sees an ability to bundle the Nook device platform in its product sales to customers in the education arena, thereby differentiating itself from its competitors.

The bottom line
Houghton Mifflin Harcourt is back, although it seems to need some further rightsizing of its operating structure in order to earn solid financial returns in a digital-publishing world. It also probably needs to change its mind-set from being a distributor of learning materials to being an enabler of learning outcomes, much the way that Pearson has done.  As such, investors should watch things unfold at Houghton Mifflin Harcourt from the sidelines.

1 stock you should make a play on now
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Fool contributor Robert Hanley owns shares of Barnes & Noble. The Motley Fool owns shares of Barnes & Noble. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers