Documentation

This valuation was done on the 2021-02-11

Educational Development Corporation

EDUC.NASDAQ

- USD
 Shares Outstanding
Business Description
Educational Development Corporation, a publishing company, operates as a trade co-publisher of the line of educational children's books in the United States. The company offers various books, including Touchy-Feely board books, activity and flashcards, adventure and search books, art books, sticker books, and foreign language books, as well as science and math titles, and chapter books and novels. It operates through two divisions, Home Business and Publishing. The Home Business division distributes books through a network of independent consultants using a combination of direct sales, home parties, book fairs, and Internet based social media platforms. The Publishing division markets books to bookstores, toy stores, specialty stores, museums, and other retail outlets throughout the country. The company distributes children's books published by Usborne Publishing Limited in the United Kingdom. Educational Development Corporation was founded in 1965 and is headquartered in Tulsa, Oklahoma.
Competitors

EDUC doesn't have too many competitors. The other competitors in this space are all in the book publishing industry but none of them (from what I could see) have the unique sales approach of MLM (multi-level-marketing) that EDUC has. Because of this, EDUC has benefited extremely well from the COVID pandemic as the majority of it's revenue is derived from MLM whereas other book publishes rely on sales to book stores which have been closed.

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Looking Forward

Because of COVID the amount of parents who have stayed at home has sky-rocketed due to schools being shut and jobs being lost or furloughed, this has played directly into EDUC's MLM strength as more parents are looking for a side income or a way to make money in their spare time. Combine this with their existing knowledge of Usbourne books and it has resulted in a record number of consultants for the company, rising from 33,600 in Nov. 2019 to 57,200 in Nov. 2020, an increase of 70.2%. These consultants are the ones driving new sales of EDUC books to their existing network. As we all know, MLM's are terrible money makers for the consultants and only a select few of them make any amount of significant money, however for the owners of the company (i.e us) it is very profitable.

Relative Numbers

EDUC has very nice debt-equity ratio's and interest coverage. Their operating margins and ROIC are also above the industry average.

The key figure from above is the price-to-owner-earnings and price-to-operating-cash-flow. They are extremely small at just 4.38 and 4.11

The PEG ratio of 0.29 is artificially too low here because we shouldn't expect this exponential growth of earnings to continue into the future at the same rate when COVID slows down. However it's ratio is still very very low. Basically on every relative measure we get a nice low ratio.

Industry Averages (US)

Retail (Distributors)

7.23% CAGR Past Five Years
8.35% Pre-tax Operating Margin (TTM)
13.57% ROIC (TTM)
1.79 Sales to Capital Ratio
6.37% Cost of Capital
0.89 Unlevered Beta
1.28 Levered Beta
The input values I chose for the DCF
CAGR in Years 1-5
10% - 

Given that EDUC has already received massive growth from COVID, I expect it the growth to slow down rapidly once the restrictions have been eased. In fact, in the next year they could even have flat or slightly negative growth as consultants leave back to their old jobs.

I put 10% here as I think this is what they can achieve given their past performance and new consultants army.

Operating Target Margin in Year 10
7% - 

This was chosen as I expect the new logistics and warehouse investments (which management discussed in their recent earnings call) to take affect. I also think their margins should be sustained as they have stopped selling on amazon and the new consultants should sustain this margin for EDUC.

Year of Convergence
2yr - 

There isn't a big difference in my 10 year oper. margin target and the current oper. margins so this value doesn't really matter.

Sales to Capital Ratio
2.8 - 

I looked at EDUC's past sales to capital ratio's (excluding their TTM which has been inflated due to COVID) and think they can achieve this as EDUC doesn't really have to invest much any more to sustain their growth due to the natural network affect of consultants recruiting new consultants.

Hint: Have a play with the below inputs yourself and see how the valuation changes.

DCF Valuation

Need help? Check out the DCF docs here.

in (millions), except per share amounts

Excel

Conclusion

I have estimated the shares to have a share price of - per share.

On the 11th Feb. 2021 they traded for - a share which gives a margin of safety of .

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