Franklin Covey: Not A Good Enough Reason To Buy As Yet

| About: Franklin Covey (FC)

Summary

Q2 results were disappointing.

All Access Pass is good for driving revenue growth, but we still need more stats to prove it.

Fears of a recession will dampen investor sentiment which may send the stock further down.

Franklin Covey, (NYSE:FC) the corporate educational services and performance training company recently published its Q2 2016 results, which led to a bit of a bearish response by the markets. Post the earnings announcement, FC's stock plunged below $15 from pre-earnings level of $17. The Street wasn't impressed with the loss of $0.44 million against a profit of $0.42 million in the previous year's second-quarter results. Revenue also ended lower at $45.27 million, down 2.26% from the previous year's quarter.

While FC's bottom-line performance has not been impressive of late, revenue and profits have climbed steadily in previous years owing to its ability to provide quality services for corporations. Perhaps, the recent fall in sales, and rise in SG&A can be taken with a pinch of salt.

Since 2008, Franklin Covey's stock had quite a run from just $3 to a peak of $20 back in 2014. The stock began trending down since then, and is now trading just above $14. So does the plunge in stock price present a good buying opportunity? Let's do some digging.

The Competition

The training and education space remains highly competitive with lots of me-too firms that offer similar training services. Besides Franklin Covey, there are numerous companies such as Learning Tree International, Inc. (NASDAQ:LTRE), SmartPros Ltd (NASDAQ:SPRO), Legacy Education Alliance, Inc. (OTCQB:LEAI), and so on. These companies provide training and learning solutions for the education sector as well as the corporate sector. They have been competing with each other in this field with the help of constant innovation.

On the bright side, Franklin Covey happens to be one of the top personnel training companies in the industry. It was recently recognized as one of the top 20 sales training companies for the ninth consecutive year by trainingindustry.com. As businesses worldwide continually try to adapt to changing needs and demands of their customers, the need for quality training and development of employees will continue to remain relevant.

Introduction of the All Access Pass

In November last year, Franklin Covey did a small pilot launch with the help of a few client partners to up-sell "All Access Passes." The value proposition is that it allows clients to access a wide range of course content and training materials provided in the form of notes, webinars, videos, PowerPoint presentations and other tools. The offering also allows clients to incorporate licensed content into a client's existing training programs and processes specific to their business. Since the soft launch in November, FC managed to sell 133 passes valued at $3.2 million. More notable is that the company managed to virtually double, and in some cases triple the average value of sales per client.

While this new offering might attract some skepticism, in my opinion, the move is a smart one that would eventually help drive sales growth in the future for an industry where competition is tough and development expenses are sky high.

Though one major downside of the All Access Pass would be the virtual cannibalization of FC's other standalone products. Nonetheless, the All Access Pass will encourage customer loyalty and would motivate clients to use the offering for all their training requirements instead of depending on other service providers as well.

US Economy

The health of the US economy and corporate hiring trends would be key indicators to watch out for. The US employment report for March 2016 was rather encouraging with an increase in number of jobs and wages. However, there are some analysts who believe that the US economy could be heading into a recession soon.

Albert Edwards, analyst at the French bank Societe Generale (OTCPK:SCGLF) is of the view that a recession might be imminent. His rationale can be summed up with the following quote:

"Whole economy profits never normally fall this deeply without a recession unfolding. And with the US corporate sector up to its eyes in debt, the one asset class to be avoided - even more so than the ridiculously overvalued equity market - is US corporate debt. The economy will surely be swept away by a tidal wave of corporate default."

Edward is not the only one to voice his concern for the domestic economy; Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC) have also steeply cut earlier forecasts for first quarter US economic growth. While BAC cut its forecast from 2% to just 0.6%, Wells Fargo estimated growth to be close to nothing to 0.1%, a huge markdown from 1.4% forecasted earlier.

Takeaway

Overall, Franklin Covey is rather well managed. The books have hardly any debt and the company enjoys a substantially high gross margin. However, FC has become a bit tardy with controlling costs. A look at the annual data, reveals growing revenue and profits through 2014, but 2015 witnessed slowing revenue growth and a drop in the year's bottom line.

A lot depends on the company's ability to deliver compelling products such as the All Access Pass. Its success so far with the product is encouraging because gaining market acceptance in a highly competitive training industry is very difficult. Franklin Covey's significant investments in developing high quality content over the years will eventually pay off. With large organizations shifting their training to third-party service providers, Franklin Covey stands a good chance to get a part of the action. However, as discussed earlier, negative economic signs could put a dampener on investor sentiment, which in turn could send FC's stock further down.

It will be interesting to observe how the "All Access Pass" performs in the coming quarters. I think it should be good as the response since launch has been quite encouraging. But until we see some good numbers, it would probably be better to look the other way for now.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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Tagged: , Education & Training Services, Earnings
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