Franklin Covey Nearing An Inflection Point

I published my first write-up on Seeking Alpha today. The summary of my thesis is:

  • Franklin Covey (FC) is going through a SaaS transition that is temporarily harming its financials.
  • The new, improved business model should become more obvious to the market in the coming quarters.
  • There is upside of 40-80% over the next 18 months with potential for more longer term.

To read the entire write-up, head over to https://seekingalpha.com/article/4084174-franklin-covey-nearing-inflection-point

As of this writing, Wiedower Capital owns shares in FC. This is subject to change.

 

2 thoughts on “Franklin Covey Nearing An Inflection Point

    • I agree FC has been a tough one to parse through the financials on. I wrote the following in my 2017 annual letter: “On the valuation side, I struggle to see how the new business model isn’t more efficient than their old one (customers who auto-renew to your software are better than customers you have to explicitly sell products to every year). From 2013-2015 (before this transition began), my estimates for their normalized earnings margins were 7-8%. Now there’s a lot of noise in the current financials due to the transition, but let’s ignore all that and just guess that their new normalized NOPAT margins with a more efficient business will be 9%—a little better than they achieved with their worse business model. Management’s guidance for 2018 revenue is $227 million (including change in deferred revenue which is real cash in the door). $227 million x 9% = $20.4 million—what I would call owner earnings or NOPAT. I personally believe the company deserves a multiple in the 20s, but even a 20x multiple on those 2018 owner earnings would result in a stock price of $25.28 (~25% above today). If the new business model is more efficient than their old one, it’s hard to justify today’s price. Oh, and that entire calculation is before tax reform. Similar to Parks! America, it’s still unknown how much of the tax cut will drop to the bottom line (increased wages and investments will probably take up a portion), but Franklin Covey is a full tax payer so they will benefit from tax reform more than most. After tax reform, it’s hard for me to get a fair value lower than the high $20s.”

      Since then, results have shown that gross margins (and thus earnings margins) are going to be quite a bit higher than I expected. From the Q1 2017 presentation and call, management thinks they can get free cash flow margins to the low-to-mid teens in a few years, which is just ridiculous if true. I’m not counting on that, but even modest growth plus a 10-12% FCF margin in a few years discounted back to today results in very nice IRRs.

      Liked by 1 person

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