Houghton Mifflin Harcourt Stock Up 24% Yesterday - Here's Why

One of the biggest gainers in yesterday came from Houghton Mifflin Harcourt (NASDAQ:HMHC), a stock many will likely at least vaguely remember from their high school days as being one of the biggest textbook publishers around. The company saw gains of over 24.6% yesterday and managed to hold on to most of them going into pre-market trading today. So what drove that explosively-upward cant? One big piece of news led the way, but it was hardly alone.

The Big Sales Event

The biggest point driving Houghton Mifflin's upward drive was the sale of its consumer books division, HMH Books and Media, to News Corp (NASDAQ:NWS). The deal means two crucial points for Houghton Mifflin: one, the company just landed $349 million in cash, and two, it just opened up the ability to focus almost completely on its K-12 education arm, where it sees quite a bit of opportunity.

HMH Books and Media actually controlled a wide range of titles, including not only childhood favorites like “Curious George” and “Carmen Sandiego”, but also the “Lord of the Rings” series, which as most will remember was a massive movie franchise that all but ruled the 2000s into the 2010s with the three-part adaptation of “The Hobbit,” as well as the “Return of the King” trilogy before that.

This is actually a move that dovetails well for News Corp, which has been buying up legacy media assets for some time now. By making this purchase, News Corp lands a hefty slug of same, though its own stock didn't move much as a result of the purchase from Houghton Mifflin.

Analysts Largely Unfazed

While this is a big move for Houghton Mifflin, the broader analyst pool seems relatively unfazed by the matter, according to our latest research. Houghton Mifflin has been considered a consensus “hold” for the last two years, and the ratios comprising said consensus haven't shifted much in that interim.

Going back all the way to January 2020, the company had three “hold” ratings to its credit. That increased to four “hold” with April 2020's arrival, which remained the case until September, when it increased to five “hold” ratings. It maintained that ratio until just recently, when it dropped to four “hold” ratings again.

Price targets, meanwhile, aren't exactly looking for explosive gains either; the current high price target on the company is just $6 per share, and the average is actually down around $3.32.

Basic Corporate Math: Focus + War Chest = New Potential Gains

This move adds up to be fantastic news for Houghton Mifflin. The calculus behind such an outcome works essentially like this: not only has Houghton Mifflin removed a diversionary issue away from its operations—it no longer has to manage the various media properties it owned—it now can focus wholly on the K-12 market, as stated previously.

With the arrival of the coronavirus, and the resulting shutdown of schools throughout the US—or their switch to online learning—Houghton Mifflin's newfound focus should serve it well. It now can address the likely massive demand for homeschooling materials, as many parents likely found that homeschooling was not as resource-intensive as previously thought since they were forced by circumstances to actually try it. Not all parents will feel this way, of course, but for those who do, a fairly substantial new market just opened up for the educational publisher. With Harcourt Mifflin now looking to streamline its operations by focusing on a software-as-a-service (SaaS) delivery model, there's a new opportunity to open up access to that market. Plus, it can also better reach its original market; with the various variants of Covid-19 emerging and the various government responses seen therein, who knows how long until another huge lockdown is called and the need for software-based textbooks delivered over an SaaS model becomes more vital than ever?

Some reports also suggest that the cash realized from the sale of HMH Books and Media might also be used toward paying down the company's debt, which would be even more worthwhile in the long term. A largely debt-free company in the education space could be a real winner, especially these days. Keeping some of that cash aside for sales and marketing collateral couldn't hurt either; the company needs to get the word out about this new focus, after all.

Taking all these factors together suggests that the recent gains seen at Houghton Mifflin aren't likely to be temporary, or lost quickly. Getting in on the company now may be a particularly smart move, especially if it can build on these recently-minted advantages effectively.