School Specialty, Inc. (SCHS) reported disappointing results for its fiscal second quarter, and management lowered its guidance for the fiscal year 2009. The company earned $1.76 per share, which was well below our estimate of $1.92.
The shortfall was due to a decline in state revenue. SCHS is highly dependent on its state and local government for its revenues. A slowing economy and de-leveraging in the credit markets will only exacerbate the problems in government funding. We expect this trend to continue, and that will hurt School Specialty's results. As a result, we are lowering our fiscal 2009 and fiscal 2010 estimates to reflect a reduction in state spending.
We are also downgrading SCHS shares from Hold to Sell. SCHS shares are currently trading at 7.9x our fiscal year 2009 EPS estimate and 11.1x our fiscal year 2010 EPS estimate. Our target price is $10, or about 8x our fiscal year 2010 EPS estimate.
Read the full analyst report on SCHS
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