Please ensure Javascript is enabled for purposes of website accessibility

Foolish Forecast: The Year in (Princeton) Review

By Rich Smith – Updated Nov 15, 2016 at 5:50PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Views you can use to get clues on tomorrow's news.

We're finished with 2005, and we're quickly approaching the end of Wall Street's series of fiscal final exams as well. Next up, test-prep company Princeton Review (NASDAQ:REVU), which reports its Q4 and full-year 2005 numbers before the market opens tomorrow. So sharpen your pencils and power on your calculators, Fools. This will be an open-book test.

Wall Street Wisdom:

  • General consensus. Exactly one analyst follows Princeton, and that person gives the company a lukewarm hold rating.
  • Revenues. This analyst expects quarterly sales to climb nearly 19% to $33 million ...
  • Earnings. ... and for last year's losses to turn into a $0.03-per-share profit in Q4 2005.

Margin watch:
Ugh. Princeton investors had better hope the analyst got it right this time, after overestimating the company's profits in three of the past four quarters. Because judging from the company's margins, things are not going well at Princeton. The rolling gross margin is down nearly 400 basis points over the past 18 months, and both operating and net margins have turned firmly negative.

Margins %

6/04

9/04

12/04

3/05

6/05

9/05

Gross

67.7

65.3

64.3

64.2

63.1

63.8

Op.

6.9

1.6

(4.6)

(3.3)

(4.4)

(3.2)

Net

4.3

1.3

(26.7)

(25)

(25.5)

(22.9)

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish forensics:
I've got good news and bad news for Princeton owners. The good news is that these "rolling" margins hide the fact that most of Princeton's bad news over the past year came out in a single quarter: Q4 2004. That's when an operating loss, a goodwill impairment charge, and a huge provision for income taxes combined to plunge the company deeply into the red. Since that horrible quarter, things haven't been as bad at Princeton.

The bad news is that, on a cash-profits basis, the company still looks like a pretty lousy business. Over the past 12 months -- months that, with all the changes in standardized testing going on, probably should have been wonderful for a company whose business is training kids to take those tests -- Princeton utterly failed to generate positive free cash flow. Instead, it burned through $9.1 million. Whatever Princeton's GAAP numbers turn out to be tomorrow, keep an eye on that cash flow situation. It's got to reverse course if this company is to survive.

Competitors:
Princeton's primary competitors are units of much larger companies: Kaplan is a unit of Washington Post (NYSE:WPO) and Harcourt a part of Reed Elsevier (NYSE:ENL).

Fool contributorRich Smithdoes not own shares of any company named above.

None

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Graham Holdings Company Stock Quote
Graham Holdings Company
GHC
$535.34 (-1.53%) $-8.32
Education Holdings 1, Inc. Stock Quote
Education Holdings 1, Inc.
REVU.DL

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.