Since starting in 2009, Creative Learning Corp. (OTCPK:CLCN) has sold 446 franchises across the U.S. and in countries across the globe. The primary franchise concept is Bricks 4 Kidz (430) and a second franchise concept was recently launched, Challenge Island (16).
What happened in 2013?
The stock had traded range bound around $0.60 for the first half of 2013, then exploded up to trade range bound around $1.60-$1.80 for the second half of 2013. For personal disclosure, I bought this stock in early 2013 and held on for the joyful ride up into the stratosphere, making it my best performing holding (both % and $) for the year. I ended up selling 90% of my position as I saw more attractive opportunities elsewhere. I also anticipated weaker fiscal Q4 results due to the franchise update the company provides.
CLCN had another strong year, with franchises increasing from 210 to 380. The company provides updates approximately monthly as to the number of franchises. This transparency makes calculating quarterly revenue fairly straight forward. Franchise sales in fiscal Q4, for the period ending Sep. 30th, was softer than fiscal Q4/12, however revenue from royalties as well as the corporate creativity center the company runs helped to increase total revenue 8% above fiscal Q4. For the year, revenue increased 41% and net income was up 57% over the previous year.
What does 2014 have in Store?
Fiscal Q1/14 looks like it will easily be the best quarter in the company's short history. In addition, the company is having an increasingly larger percentage of revenues as royalties.
Management gave first quarter revenue guidance of $1.7 million. Based on the number of franchises sold and the royalty revenue the firm generates, I believe this may be on the low side and would expect between $1.8-$1.9 million based on conservative estimates ($1.55 million of new franchise revenue and $0.3 million of royalty revenue). Can this momentum continue for the rest of 2014? Fiscal Q1/14 revenue will be more than double Fiscal Q1/13 revenue. I'm not expecting every quarter of fiscal 2014 to be double that of the previous year, but I would expect to see continued momentum, which will result in higher revenue and earnings.
As I mentioned, the royalty revenue has increased over time. It was 7% in fiscal 2011, 14% in fiscal 2012, and 21% in fiscal 2013. As this becomes a larger percentage of revenue, CLCN will not have to worry about selling new franchises to pay the bills and we should see more consistency in earnings.
The Challenge Island concept allows for some diversification. Although there have only been 16 sold since the launch, it is still less than a year old and could ramp up over the coming year. There is still a lot of room for Bricks 4 Kidz to grow, both within the U.S. and in international markets. CLCN is developing a third franchise concept called Sew Fun. This will be different than the first two as it will be a brick and mortar business featuring stores/studios and be geared toward adult classes as well as children.
Valuation and Financial Strength
When looking at micro cap stocks trading on the OTC BB, there are certain things I look for (check my instablog for more detail on this). Looking at CLCN's balance sheet, the company has $2.0 million of cash and no debt. They have consistently increased shareholder equity, while at the same time minimizing shareholder dilution. This solid balance sheet gives me a level of comfort.
One potential red flag is that the officers of the company sold at net 550K shares during the past year. However it gives me comfort that they still own 32.4% of the company.
The current valuation of CLCN is still quite reasonable at a P/E of 22.3 based on trailing earnings. Earnings of $0.12 for fiscal 2014 is not unreasonable, which would give the company a forward P/E of 14.6. My 12 month target price is $2.45, which is about a 44% premium to what the stock is trading at today. I believe 2014 will be a good year for the company and for shareholders.
Disclosure: I am long CLCN, .