FC Franklin Covey Co

Sector financial performance:

This company, who primarily provides training and consulting services to improve individual and organizational performance, has been grouped into performance improvement consulting sector in education industry.

From the sales of companies in this sector, it seems that the demand for training and performance improvement consulting services from customers of US market is not strong. Companies in this sector continued to expand their services to international market, which seems to be growing quickly.

Due to tightened demand and thus pressured sales, companies have usually faced issues of shrinking gross margins and increasing SG&A as percentage of sales. As a result, companies’ operating margins all decreased to some extent. The typical operating margins among those companies are between -1.5% and 4% down from 8-12% three years ago.

According to our analysis, the typical companies’ enterprise price/EBI ratio is 34 with an interest/EBITDA ratio of 22%. The typical companies’ enterprise/sales ratios are 0.8-1.9.

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Company performance:

It seems that the demand for performance improvement training and consulting from companies in US market has been declining as indicated by decreased sales from its office segment in 2015/16 but see a sign that the demand may be coming back in 2017/18. Contracts from government seem to be strong but present instability. Expansion in China market continued to bring revenue as expected but face foreign currency risks.

The first three quarter of fiscal 2018 compared with the same period of 2017(ended 20180531)

Net sales (excluding acquisition) increased about 12.5% (12% for 3Q) primarily due to deferred sales and from government services.

The fiscal 2017 compared with the of 2016(ended 20170831)

Net sales decreased about 7.4% primarily due to decrease in domestic office service offset by the increase in China area.

Fiscal 2016 compared with 2015

Net sales decreased about 5% primarily due to decrease in domestic onsite presentation and loss from government contracts.

Fiscal 2015 compared with 2014

Net sales increased about 2.4% primarily due to increase in government contracts offset by foreign currency impacts.

This company’s gross margin went down by about 100 basis points in the previous three years to about 66% in 2017. During the same time, the SG&A as percentage of sales increased significantly as a result of both increased SG&A spending and deleveraging of declining sales. Its operating margin went down to about -3% in 2017 (based on 12 months trailing data). However, as increase from subscription revenue of high margin, we see the improved gross margin in 2018 (70%). Therefore, while increased SG&A% due to increasing investment in sales we see its operating margin to be improved to about -1.5% in 2018.

Stock price

This stock currently has a companies’ enterprise price/sales ratio of 1.9 ($25). We think that its stock is being relatively fairly valued considering the increasing potential from its subscription revenue.