Educational Development Corporation - Earnings Growth Accelerates In Q1

| About: Educational Development (EDUC)

Summary

On July 17, Educational Development Corporation released its fiscal Q1 '18 results.

Revenues grew 18% vs. Q1' 17 while earnings increased 98%.

For the third quarter in a row, net margins were strong, indicating that the company's capital investments to increase the efficiency of its operations are continuing to pay dividends.

Trailing twelve months EPS now stands at $1.01/share (excluding the $0.16/share asset impairment charge recognized in Q4 '17), resulting in a P/E ratio of 10 based upon the July 17 closing price of $10.33/share.

On July 17, Educational Development Corporation (NASDAQ:EDUC), distributor of children's books published by Usborne Books and Kane Miller, reported excellent Q1 '18 earnings:

  • Net income grew 98% vs. Q1 '17, resulting in earnings per share of $0.30 for the quarter against $0.15/share in the same quarter last year
  • Sales increased 18% year-over-year on top of 136% revenue growth during Q1 '17 compared with Q1 '16
  • Q1 '18 net margins increased to 4.5% vs. 2.7% in the same period last year
  • Continued growth in the company's sales consultants is helping to drive increases in revenue as EDUC ended the quarter as of May 31 with 27,600 consultants, up 27% year-over-year

Fiscal 2018 and Year-Over-Year Comparisons

The company is off to a great start for its fiscal 2018. The company struggled to manage significant growth in sales during much of fiscal 2017, and Q2 '17 results were indicative of these challenges as revenues increased 105% year-over-year while earnings were down 51% ($0.08/share) compared with Q2 '16. This will make year-over-year comparisons during Q2 '18 extremely favorable with the possibility of earnings increases to reach 250%-300%. Q3 '17 earnings were up just 1% year-over-year, which should provide further opportunity for significant earnings growth in Q3 '18 during the company's busy peak season in the fall.

Balance Sheet and Credit Lines

A peek at the balance sheet shows that working capital increased to $9.7M as of the end of the May 31, 2017 quarter compared with working capital of $8.5M as of the previous quarter ending February 28, 2017. While EDUC is driving sales growth and operational improvements through debt funding, the company is taking measures to optimize its working capital as inventories dropped $4.5M over the last three months. This was more than offset by a decrease in payables of $7.1M, resulting in negative operational cash flow of $342K when other changes in working capital are considered. As the company further invests in capital equipment to increase the efficiency of its operations and ensure shipping capacity can accommodate anticipated further growth in sales, additional draws on its line of credit may be required. On June 15, subsequent to the end of the May 31 quarter, the company announced that its borrowing capacity had been increased by its lender to $10M (and potentially up to $15M under certain conditions) with $5.6M outstanding as of the end of the quarter.

Valuation

EDUC's stock price is up 47% since its last earnings release reported on May 30. My previous Seeking Alpha article regarding EDUC published on May 31 indicated the stock had very favorable valuation prospects, and I believe this continues to be the case. Consider the following (P/E ratio calculations are based upon the July 17 closing stock price of $10.33/share):

  • Trailing twelve months EPS of $1.01 (excluding the $0.16/share asset impairment charge recognized in Q4 '17) yields a P/E ratio of 10
  • Based upon its Q1 '18 earnings of $0.30/share, the company is on a go-forward run rate of $1.20/share which yields a P/E ratio of 9
  • If the company were to grow sales for the remainder of fiscal 2018 at a 15% clip (vs. 18% revenue growth in Q1 '18) and achieve the same net margin of 4.5% in each quarter going forward that it reported for Q1 '18, fiscal 2018 EPS would be $1.36/share, yielding a P/E ratio of 8
  • Taking a slightly less conservative approach, 20% sales increases for the remainder of the fiscal year combined with achieving 5.0% net margins would yield earnings of $1.53/share, which brings the P/E ratio down to 7

Recommendation

Based upon continued trends of increasing revenues and earnings, potentially favorable quarter-over-quarter comparisons during the remainder of fiscal 2018, and an extremely desirable stock valuation with low P/E ratios under various scenarios as indicated in the Valuation section above, an investment in Educational Development Corporation remains a very compelling opportunity.

Disclosure: I am/we are long EDUC.

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.

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