North America Enterprise Expansion Will Capture Opportunities And Face Risks

Key Takeaways

• Strategic contract renewals and expanded investments in content and tech are boosting client retention, revenue, and net margins positively.
  
• Strong demand in Education and cost management enhancements are driving revenue growth and improving profitability through increased EBITDA.
  
• Economic and geopolitical challenges, alongside investment risks, could depress Franklin Covey's revenue and margins, particularly in government and international segments.

Catalysts

Provides training and consulting services in the areas of execution, sales performance, productivity, customer loyalty, leadership, and educational improvement for organizations and individuals worldwide.

• The go-to-market transformation in Franklin Covey's North America Enterprise business is gaining traction, which is expected to significantly accelerate revenue growth and subsequently improve adjusted EBITDA and cash flow.
  
• The strategic focus on renewing and expanding contracts is leading to high renewal rates and increased average revenue per client, which is likely to boost future revenue and net margins.
  
• The company's targeted investments in content, technology, and delivery capabilities are expected to increase deal sizes and improve client retention, which should positively impact earnings.
  
• The Education business is experiencing strong demand, with significant growth in district and state-level opportunities. This continued strength is expected to contribute to overall revenue growth and margin stability.
  
• The company's ability to manage and trim its cost structure amidst government-related revenue impacts is anticipated to increase the flow-through of future incremental revenue to adjusted EBITDA, improving overall profitability.

Franklin Covey Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Franklin Covey's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.2% today to 3.3% in 3 years time.
• Analysts expect earnings to reach $11.0 million (and earnings per share of $0.71) by about April 2028, down from $17.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 54.8x on those 2028 earnings, up from 14.6x today. This future PE is greater than the current PE for the US Professional Services industry at 19.7x.
• Analysts expect the number of shares outstanding to decline by 0.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.38%, as per the Simply Wall St company report.

Franklin Covey Future Earnings Per Share Growth

Risks

• Economic uncertainty and government budget cuts are impacting Franklin Covey's revenue, especially in its government business, which could lead to a decline in overall revenue growth.
  
• The international segment is affected by geopolitical tensions and trade issues, particularly in China, which might cause instability in international revenue streams.
  
• The potential restructuring of U.S. federal education funding could affect state-level education budgets and lead to reduced purchasing, impacting education segment revenues.
  
• The $16 million investment in growth initiatives impacts current year margins and requires successful future execution to achieve anticipated returns, posing execution risk and affecting net margins.
  
• Currency fluctuations and economic recession fears could further depress foreign and domestic sales, impacting revenue and net earnings projections.

Valuation

• The analysts have a consensus price target of $41.667 for Franklin Covey based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $60.0, and the most bearish reporting a price target of just $30.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $332.6 million, earnings will come to $11.0 million, and it would be trading on a PE ratio of 54.8x, assuming you use a discount rate of 6.4%.
• Given the current share price of $19.96, the analyst price target of $41.67 is 52.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.