Houghton Mifflin: Digital Transition Improves Cash Generation

Mike Kruger of MPK Partners presented his investment thesis on Houghton Mifflin Harcourt (US: HMHC) at Best Ideas 2022.

Thesis summary:

Houghton Mifflin Harcourt is the largest publisher of K-12 instructional materials in the US. Covid-19 accelerated this sector’s shift to digital delivery, and business models are becoming more software-like. Houghton’s cost cutting program goes hand-in-hand with this transition and has radically improved cash generation.

Despite a very difficult 2020, the company still generated cash, and the recent EV is just 6x Mike’s estimated mid-cycle unlevered FCF.

Tailwinds abound:

Houghton has a net cash balance sheet in a sector with leveraged competitors.

It has the largest salesforce, making it an ideal acquirer of ed-tech startups.

It has the greatest product breadth, allowing it to digitally connect Core instructional materials with Extensions.

It is likely to call its expensive debt in February, slashing interest expense.

Finally, a tsunami of federal aid appears poised to hit the sector in 2022-2024.

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About the instructor:

Mike Kruger’s first investment experience was watching his shares of Berkshire Hathaway get cut in half during the tech-mania of the late 1990’s. But he didn’t panic, and today manages a global focused value portfolio of equities and distressed debt in New York City. He previously worked as a former equity and credit analyst at Promethean Asset Management LLC in NYC, and prior to that as a high-yield credit analyst at Liberty Mutual in Boston. He holds a Bachelor’s degree from the College of Arts and Sciences at Cornell University.

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