EDC Is A Hyper Growth MLM Without The Baggage.

 

Seeking Alpha is the premier website for actionable stock market opinion and analysis, and vibrant, intelligent finance discussion. In contrast to other equity research platforms, insight is provided by investors and industry experts rather than sell-side analysts. This is an article by a Seeking Alpha author on Education Development Corporation, the MLM distributor for Usborne Books. He says Educational Development Corporation Is A Hyper Growth MLM Without The Baggage.

Summary

• The company is currently increasing sales agents by over 50% each quarter. Sales this quarter should be more than double last year’s quarter.
• The majority of sales are through multi-level marketing. The MLM system used does not have the abuses other MLMs have. Also the product is much better.
• Based on my earnings estimate of $0.70-$0.85 for the FYE February 29, 2016, the stock is trading at a 13-16 PE ratio. Way low for a company growing this fast.

There have been several recent Seeking Alpha articles on Educational Development Corporation. This article attempts to get more in depth on this rapidly growing company. Specifically more attention is paid to why this is a better MLM model.

EDUC is a distributor and publisher of children's books. Its primary business is as the U.S. distributor for Usborne Books. Usborne is an English company. EDUC also publishes children's book under the Kane Miller brand. Kane Miller books are books previously published overseas, for which the author did not have a U.S. publisher.

Usborne Books have been published since 1973. EDUC has been in business since 1965 and is a longtime U.S. distributor for Usborne Books. Usborne offers around 2,000 titles at any time. Revenues for EDUC totaled $32.5 million in the fiscal year ended February 28, 2015, up from $26.1 million one year earlier. Net income was $859,000 in FYE 2/15, up from $358,000 in FYE 2/14. EDUC has two methods of marketing its books, the traditional sales method, and multi-level marketing (NYSE:MLM). In FYE 2/15, 44.6% of sales were through MLM. Sales using the traditional method are to book, toy and other retailers. MLM sales are through sales agents who sell to schools and libraries and to individuals through home shows and the Internet.

Over the past four months, the MLM portion of the business has taken off. EDUC has had an MLM system since 1989. Sales grew to $24 million in 2005 but then fell to $14.5 million in FYE 2/15. Management then realized that allowing sales of new books on Amazon was the cause of the decline. Sellers on Amazon were undercutting the other sales agents. After sales of new books through Amazon by EDUC were discontinued, MLM sales took off. There were 7,800 active sales agents on February 28, 2015. The company added 1,862 agents in the first quarter (ended 5/15) and 4,800 agents in the second quarter of 2015 (ended 8/15). In September, 2015 alone, another 2,900 agents were added, and now total over 15,000. All of these new agents juiced sales. Sales in the second quarter of 2015 (ended 8/15) totaled $12.6 million, up 85% from one year earlier. MLM sales increased 152% in the quarter. Sales growth was driven in particular by internet sales.

Remember Tupperware parties? EDUC sales agents have a 21st century Tupperware party. It's called a Facebook party. The agent meets with a number of her customers together on Facebook and uses You Tube to show videos of the product. Internet sales which are mostly Facebook parties increased an astounding 379% in the quarter ended 8/15 and now constitute around half of all MLM sales.

Also increasing rapidly are Kane Miller sales. This business was acquired several years ago when it was doing $1.5 million in sales annually. It now does over $7 million per year. Kane Miller is also sold traditionally and through MLM. Since this is the self-publishing business, margins are higher than on the Usborne books.

This business has the following positives

1. This is not a traditional MLM which sells potions and lotions of dubious value and abuses its sales agents. The product, primarily Usborne Books, is highly regarded and has been around a long time. My wife was a career children's librarian and had good things to say about Usborne. While that is anecdotal, it is corroborated by ratings on Amazon. There are over 10,000 Usborne and Kane Miller titles on Amazon, most of which have 4.5 or 5 star ratings. Most books on Amazon are used, new books are no longer sold there by EDUC. There is no fee or cost to sign up as an agent. Most agents do not carry much paid for inventory. This is because, unlike any other MLM I know, the company ships inventory to the agents without asking for payment until they sell them. Most of the agent's inventory is held this way. Also the internet sales are shipped directly to the customer from EDUC, so the need for inventory is less. Over $2 million of the inventory currently on EDUC's books is actually with the sales agents. The minimums to get bonuses are much lower than other MLMs, in the hundreds of dollars instead of in the thousands.

2. The best time to invest in an MLM is early. Right now sales growth is exploding and accelerating. The potential remains huge. The company has hit on something new and exciting with its Facebook parties. However there also remains significant potential for more traditional customers such as schools and libraries. MLM sales to schools and libraries increased 57% in the second quarter (ended 8/15) from one year earlier.

3. The balance sheet is strong. The only loan on August 31, 2015 was a $1.35 million draw on the $4 million line. Management does not believe a larger line is needed because receivables are low and inventory, while high, is declining relative to sales.

4. Management is currently faced with one of those good problems to have. There is so much demand so they are paying a lot of overtime.

5. The retail price sales agents get is the same as that sold in stores. This differs from MLM's like Herbalife (NYSE:HLF), that sell their product for 2-3 times the price their competitor's product sold in stores. This makes the EDUC MLM model sustainable.

6. Sales commissions are lower than other MLMs. Sales commissions were 33% of MLM sales in the second quarter of 2015. For Lifevantage (LVFN), they were 48% in its most recent quarter. For Nu Skin (NYSE:NUS) they were 43% of revenues. This leads to a higher profit margin. The pretax profit margin is currently about 8-9% of sales and expected to get to 10-11%.

7. The company in the beginning of 2015 worked out an arrangement with the post office to significantly lower its postage costs. This increases net income margins in 2015 and going forward.

8. Competition is fragmented. Scholastic is probably the largest children's book publisher and they own 25% of Usborne. Outside of them most children's books are published by companies that focus more on adult books.

9. The stock price is probably depressed due to the bulk of sales being through MLM, an industry that has a tarnished image. Most MLM's have had negative press in the past year. Herbalife is under attack by hedge fund manager Bill Ackman for being an illegal pyramid. Nu-Skin has run into problems in China, its largest market. ViSalus (owned by Blythe) has imploded. Lifevantage, seller of Protandim has hit a wall. EDUC needs to get the word out how their MLM model is different. Once this happens the stock should increase.

Risks

1. The MLM model can be volatile. The company itself faced a decade of declining sales through this channel. There will always be a high churn of sales agents. This requires constant recruitment of new agents. The fact that sales are increasing at the speed new agents are acquired indicates many of the new sales agents are getting traction.

2. Inventory is high and totaled 266 days of sales on August 31, 2015. However, this is down from 339 days one year earlier. High inventory is needed in this industry due to the need to buy in bulk, usually 5,000 units or more, and the huge amount of titles offered. The company has sufficient capital to carry inventory with very little borrowing.

Conclusion

Sales are seasonal. The busiest quarter is the third quarter, the one we are in now. Sales in the third quarter have averaged about 50% higher than the other three quarters each of the past two years. Sales in the other three quarters are similar to each other. The most recent quarter ended 8/15 was a record quarter and the company earned $0.16 per share. Based on the current quarter being a seasonal high, the accelerating revenue growth, a 33.3% tax rate, and a pretax margin of 9%, I estimate the company will earn $0.34 in the current quarter ending November 2015. The pretax margin should eventually increase to 10-11% as sales increase but is probably being held back currently by significant overtime. Earnings in this fiscal year ending February, 2016 should be in the $0.70 to $0.85 range. At the closing price of $11.05 as of November 5, 2015, the PE ratio is 13-16. A stock with this level of growth deserves much higher. My one year price target is $22.