|Shares Out. (in M):||4||P/E||18.0x||9.0x|
|Market Cap (in $M):||14||P/FCF||18.0x||9.0x|
|Net Debt (in $M):||0||EBIT||1||3|
We have been critically following Educational Development Corporation (EDUC) over the past few years, waiting for management to demonstrate stability in their business. Our patience was recently rewarded as third quarter and nine months results for the period ending November 30, 2013 have unambiguously demonstrated not only stability but renewed growth. The Company has taken several strategic steps that began to pay dividends in 2013.
EDUC is the type of business we absolutely love: easily comprehensible, resistant to change and economic cycles, a strong cash flow generator, minimal capital requirements and a very shareholder-friendly management team that consistently pays out free cash flow in the form of dividends. (In fact, EDUC has been consistently paying dividends to shareholders since 1997.)
With such classic and highly successful titles like Everyone Poops by Taro Gomi, EDUC is in the business of publishing and selling children’s books ranging from those appropriate for toddlers to middle school children. (Take a look at their website, http://www.edcpub.com, to get a better appreciation of their award-winning titles.)
Since 1965, EDUC has been focused on literacy, learning, and innovation. From the development of school curriculum materials in the early years, to the creation of the Publishing Division in 1978, the Home Business Division launch in 1989, the acquisition of Kane Miller Book Publishers in 2008, and the 2011 investment in Demibooks, this commitment has fueled Company growth and development.
EDUC is the exclusive United States publisher of Usborne Books. Originating in the United Kingdom, and celebrating its 40th anniversary, Usborne Books offers over 1,400 of the best non-fiction books for children and young adults. Kane Miller’s line of international picture books and fiction is a perfect complement, and with Demibook’s enhanced picture book apps and Storytime reader, the market is well covered.
EDUC’s Home Business Division’s independent sales consultants represent Usborne Books, Kane Miller Books and Storytime at home parties and book fairs, and through direct and online sales. In addition, they represent all three lines to schools and libraries, offering one-on-one sales opportunities, fundraisers, matching grant programs and more, reinforcing the Company’s support of literacy and education. EDUC’s Publishing Division markets and sells to book stores, toy stores, gift stores, museum stores and specialty outlets throughout the United States, complementing EDUC’s strong presence in the marketplace.
EDUC is headquartered in Tulsa, Oklahoma. The home office and adjacent 100,000 square foot warehouse provide for a streamlined operational and management workflow. The warehouse’s six hundred-foot-long flow-rack system expedites order fulfillment and delivery, with over 95% of orders receiving same-day fulfillment. Personalized consultant websites and IMN weekly newsletters, together with OrderPro (the Company’s proprietary software), e-commerce site, and a strong and growing social media presence, add to the success and sustainability of the Usborne Books & More Home Business Division.
The Product Lines
Usborne Books are produced and created in the United Kingdom by Usborne Publishing Limited and sold in over 85 countries in more than 75 languages. Usborne Books have long been recognized as the benchmark of non-fiction children’s books. Kane Miller Books, an award-winning publisher of children’s picture books and fiction from around the world, is based in San Diego, California. Kane Miller Books offers EDUC the flexibility to respond to market needs, publishing books that meet the demands of the sales force and its customers. Along with Demibook’s Storytime, those books can now be published and delivered in e-book form as well as traditional print, serving the needs of all customers.
The following quote from EDUC’s annual report demonstrates the market flexibility and strength of this product line. “With subjects ranging from history to art, horses to ballet, sticker books to popups, math dictionaries to first readers and baby bath books, every child’s age, stage, subject and interest can be matched with an Usborne Book. Highly illustrated, easy to pore over and dip into and written with humor, drama and intelligence, Usborne books enrich children’s interests, helping them discover a myriad of subjects with ease and success. There are internet linked reference books, stroller books, encyclopedias, historical fiction and more, all with accessible, vibrant, distinctive design and mass commercial appeal.”
Kane Miller Books
“Kane Miller searches the world for great picture books and fiction that enrich the lives and imagination of the children who read them. With art and text that combine to bring the world closer to children, sharing stories and ideas while exploring differences, Kane Miller Books offer a window to other countries, cultures and communities – including those in the U.S.”
The Home Business Division
Usborne Books & More (UBAM), the Company’s Home Business Division, markets EDUC’s product lines through a network of over 7,000 independent sales consultants. The sales consultants offer products in various venues including home shows, direct sales, book fairs, Internet sales, fundraisers, and sales to schools and public libraries. EDC Educational Services, a sub-division of UBAM, markets the product line to schools and libraries through independent Educational Consultants. This allows additional opportunities for the sales consultants. Although there are several ways to sell, home shows continue to be the foundation of the business, providing a source of constant income and business growth, increasing the networking base and providing sales opportunity leads for additional marketing avenues. Consultants have individual UBAM websites available to market their business and to set up home shows and book fairs via the Internet. In this technological age, UBAM is also using Facebook, LinkedIn and Twitter to promote the business opportunity.
Fiscal 2013 Performance
In Fiscal 2013 EDUC posted net revenues of $25.5 million, a decrease of $.8 million from 2012. Net earnings were $.8 million ($.20 EPS) compared to $1.4 million ($.36 EPS) in the previous year. Publishing division sales (42% of total sales) decreased 2.1%. The corporate decision, taken in February 2012, to cease supplying internet retailers (most critically Amazon) impacted the publishing division’s sales, resulting in a loss for the sector. Sales to the large national chains increased by 56.7%, due in large part, to the ongoing increased penetration of some of the Company’s bestselling series, such as Sticker Dolly Dressing and other activity books. This increase offset some of the losses from internet retail sales. The independent brick-and-mortar retailers reacted positively to the corporate decision to cease supplying internet retailers, resulting in an increase in sales in that sector of 35%.
The UBAM Division’s gross sales (58% of total sales) decreased 6.9% or $1.2 million during fiscal year 2013 when compared with fiscal year 2012. This decrease is attributable to lower sales in the home party, direct sales, and internet markets, offset by an increase in fund raisers and school and library/book fair sales. Average sales per order for this division were down 0.3% and the overall number of orders was down 3.8% due to reductions in each of those markets, except fund raisers which were up.
Hence, the combination of the elimination of Amazon sales and a decrease in the number of direct sales consultants led to a poor and declining business performance in fiscal 2013. Could the business improve in 2014?
Fiscal 2014 Nine Month Year to Date Performance
For the nine months ended November 30, 2013, EDUC reported net revenue of $20.2 million, an increase of $0.3 million when compared to $19.9 million for the same period in the previous year. Net earnings were $.67 million ($.17 EPS) compared to $1.01 million ($.26 EPS) last year. Net earnings decreased primarily due to the amortization of non-recurring specific marketing costs. The Publishing Division, EDC continues a trend with another quarterly net revenue increase. The division recorded an all-time record sales month in October 2013. This is due primarily to strong customer support from retail customers since discontinuing sales eighteen months ago to Amazon, which were 20% of the total division sales. The replacement of these sales is somewhat remarkable as Publisher's Weekly reported sales in the Company’s market segment were down 16% year-to-date as of November 2013.
The Home Business Division, (UBAM), reported a net revenue increase of 8% for the quarter as compared with the same quarter of the prior year. With another increase in December, the division has had seven consecutive months with increases over the prior year. This is particularly noteworthy as this division has been slower to embrace the decision to discontinue sales to Amazon. Attendance at the Company’s annual leadership training conference, held recently, increased 50% over the prior year's meeting. EDUC continues to generate positive cash flow, and during December liquidated all outstanding debt. The Company noted that it expects recent trends will continue.
On February 28, the Company made the following announcement: “EDC completed its fiscal year today, February 28, 2014. We are proud to announce unaudited results reflect a record net sales year for the Publishing division, EDC Publishing. The Home Business division, Usborne Books & More (UBAM), recorded a yearly net sales increase for the first time in nine years.
The Board of Directors has authorized a $0.08 per share cash dividend. The dividend will be paid on March 21, 2014 to shareholders of record March 14, 2014.”
Hence, it is clear that the Company has overcome the challenges of the last few years and it expects to generate strong cash flow over the coming quarters and years, allowing the Company to continue and possibly even raise its dividend.
The Company’s shares currently trade for about $3.60 per share. Given the Company’s sales and earnings recovery, we would expect fiscal 2014 earnings to be about $.40 per share and the $.32 per share dividend to be maintained. This gives the shares a price earnings ratio of 9 and a dividend yield of 8.9%, extremely attractive in this era of zero yields! From our standpoint, given the Company’s history of consistently rewarding shareholders, we are very excited to own these shares at this dirt-cheap valuation. We leave it to you to arrive at a fair valuation, but would it be unreasonable to pay $6 (a 67% premium to the current price!) for these shares which would result in a price earnings ratio of 15 and a yield of 5.3%?
The Company has a tangible book value of $3.22 per shares, resulting in a price to book of 1.12. Net current assets of almost $2.50 per share reflect an extremely conservative balance sheet. The current ratio is 2.9, with no long term liabilities on the balance sheet.
Management and shareholder interests are directly aligned. Management owns approximately 24% of the Company outstanding shares. Randall White, the Company’s Chairman and President since 1986, owns over 19% of the outstanding shares and his total compensation is less than $183 thousand, extremely reasonable in this era of highly bloated senior management compensation. Mr. White’s total yearly stock dividend of $247,000 exceeds his salary. His compensation is thus substantially determined by how well fellow shareholders are compensated. Poor Company performance and a resulting dividend cut impacts him like all other shareholders, which is exactly the way it should be.
1) The Company’s board is classified, with only a portion of the board up for reelection each year. This makes it difficult for outside shareholders to impact the board.
2) The shares are not very liquid and purchase requires patience.
3) Changing trends in the book business could adversely impact the Company.
4) The dividend could be reduced if the recovery does not continue.
In conclusion, we believe EDUC shares are attractive for the following reasons:
1) A management team devoted to rewarding shareholders with dividend payments.
2) A clearly demonstrated turn-around in the business after eliminating direct Amazon sales and providing increased support to consultants.
3) A business with minimal capital requirements allowing earnings to flow directly to shareholders.
4) Shares selling for about nine times earnings and yielding a sustainable 9%.
5) As long as people continue to have children, they will continue to buy the Company’s products.
6) A comprehensive product line with demonstrated historical sales and earnings performance.
1) Market discovers that the turn-around is real.
2) We don’t need a catalyst as we can continue to collect a nine percent dividend even if the market ignores the shares!