Franklin Covey Nearing An Inflection Point

~ Travis Wiedower

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.

 

4 thoughts on “Franklin Covey Nearing An Inflection Point”

    1. 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

  2. It sounded like the education divisions support from the Panda Express family charity has ended. I thought that could have been expounded on a bit more. Any idea of the effects?

    Overall, I’m not sure how to feel about the price action. Management seems to sort-of push out their inflection point of earnings with each call and I get the impatience. Am I missing something beyond this?

    Like

    1. Historically, Panda’s contributions were responsible for around 15% of the education segment. If that funding can’t be replaced, most of that revenue will be lost. Year to date, it’s been an 8.3% drag on education revenue (note that education has still grown this year, just not as fast as it would have otherwise). It was definitely bad news, but by my estimate it shaves less than $1 off my fair value numbers, so not a big deal. The enterprise division, and specifically AAP, makes up the vast majority of the company’s worth.

      2018 has been a mixed bag, but I’m happy with the progress. Revenue growth has been slightly lower than expected, gross margin has increased much more than I thought possible, but then increased investments have eaten up most of the gross profit dollar benefit. Once the investments into this business transition slow down, that increased gross margin should flow very well through to cash flow. Management mentioned on the Q3 call that 2019 on should see cash flow grow faster than revenue. It’s impossible for a major business transition to go smoothly, so I’m not surprised it’s been a bumpy road thus far.

      The Panda thing was bad news, but overall Q3 results were in-line with my expectations. AAP is chugging along just fine. The fact that 20% of AAP contracts are multi-year passholders is amazing to me – I would have guessed much lower. I expected the stock to be flat to slightly up after results, so unless I missed something (and I’ve already gone through the numbers and call twice), I don’t understand the market’s response.

      Liked by 1 person

Comments are closed.