The market has punished Franklin Covey’s (NYSE:FC) stock price, sending it tumbling 50% YTD. Given its solvency and growing SAAS segment, FC has about 100% upside to its valuation today.
Background
Franklin Covey is a leader in the highly fragmented L&D (Leadership and Development) corporate training industry. It is best known for content such as The 7 Habits of Highly Effective People. On average, roughly $100 billion is spent on external providers such as FC per year. This is set to grow by 13% CAGR for the next four years. This certainly has taken a dent due to COVID. Using the height of the ’09 recession as a proxy, FC’s revenue dropped 13% and rebounded sharply two quarters afterward. In short, although revenues in the short term will get hit, FC has a resilient offering and will rebound sharply. The company also did not have a SAAS segment in ’09!
FC’s traditional business model involved sending a consultant to a client site to identify their group needs. After 1-2 days, the primary group need is identified, and Franklin Covey sells them the IP for that specific content. After this, Franklin Covey would usually train a client “facilitator” who would then train others within the company. The facilitator would then order materials from Franklin Covey on a recurring basis such as manuals, CDs, etc. Typical clients have at least 200 employees and are large enough to afford external providers such as Franklin Covey, but not large enough to have their own team in-house trying to mold the company culture. Although we could not find any hard numbers, the company has reported its client profile is an even cross-section of multiple industries and is not heavily weighted in one area such as retail.
Since 2016, the company has been transitioning to have its entire content available online in different modalities for a small yearly subscription ($200/person). Franklin Covey was in a unique position to create this offering due to the amount of content it had compiled from decades of research and writing. As a dining analog, the pass is like going from buying a single meal to a buffet. The All Access Pass (AAP) library includes roughly 30 subject matter areas available in 21 languages. The content is available through online presentations, live online, micro-learning bites, podcasts, etc. This bundling of its content is much more valuable and convenient for companies that before only bought one or two of its content subjects in large manuals.
Why the discount?
The primary reason for the discount is COVID-19. The pandemic has demolished its live offerings (live training, and on-site visits, although about 70% of these have been rebooked through its live online offering). The recurring SAAS segment is obfuscated by the other segments, and looking at earnings, the company does not look to be in great shape.
Thesis
Franklin Covey has a timeless brand with social proof. The price of its entire content offering is sold at a discount to single modality offerings by its competitors. The combination of a relevant brand, pricing at extremely competitive rates, and offerings in a convenient range of modalities (e.g. podcasts, online, microlearning, etc.) should provide a bedrock for growth for years to come. The training industry is growing larger each year with about $100 billion being spent on external providers such as Franklin Covey. With its competitive advantages in a growing industry, Franklin Covey is significantly undervalued.
Valuation
The central part of Franklin Covey’s valuation is the growth of its subscription offering. This is also the easier segment to value as the model is more resilient to COVID than the other segments. We assume these recurring revenues remain flat to slightly negative for the rest of the year as companies continue to adjust to their new environments. Come 2021, we believe either companies will have normalized enough so that ancillary expenditures on items such as corporate training will be included in budgets again or vaccines come out enabling normalcy to resume. If either of these happens, we expect Franklin Covey to resume its growth of around 25% YOY. With current subscription revenue totaling about $80mm/year and with each incremental dollar earned flowing through 50% to the bottom line, this segment alone is worth in excess of $400mm. We estimate the rest of its businesses, from international licensees to facilitator sales, to be worth about another $100mm. Including a net cash position of about $25mm, Franklin Covey has about a 100% upside to today’s price.
FC has a solid brand along with a sustainable competitive advantage through its AAP subscription offering. On top of this, FC is extremely solvent along with having a variable cost structure (sales). There are scenarios in which COVID actually is beneficial to FC as companies consolidate their training and remain with the highest value per dollar provider (CEO spoke to this on the Q3 2020 conference call). Although there probably will not be an immediate catalyst (other than a vaccine) for FC; patience will be rewarded generously.
Risks
A risk from competitors includes platforms such as Lynda gaining popularity and dominating the training space. We ascribe a low probability to this due to Franklin Covey’s brand and timeless themes. There is also an element of exclusivity to FC’s offerings as opposed to Lynda.
Another risk is that corporate training becomes more and more customized in-house, reducing dependency on external providers such as FC. We ascribe a low probability to this as the ratio of companies that have developed their content in-house vs. sourcing externally has remained the same for the last 12 years. This ratio is roughly 50-50 and will likely remain this way due to budgetary constraints and convenience.
Catalysts
The most significant catalyst is the continued growth of its AAP segment. AAP sales dipped in the months of March and April, however, since then have resumed and sales in June have actually been higher this year than they were in 2019. Its Education segment has also been resilient showing almost 90% revenue retention and is on track to actually grow this year.
Another catalyst is the company increasing share buybacks. Management has high amounts of share ownership and has done significant buybacks before. The company reported in Q3 2020 that it would continue to preserve cash going into 2021, and it would then look at share repurchases.
Lastly, the resurgence of other revenue streams such as its live online offerings replacing its lost revenue (onsite, training, etc.) would give the market an idea as to FC’s resilience. A repricing would happen fairly soon after this.
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