Franklin Covey Co. (NYSE:FC)

XMFConnor (97.80) Submitted: 6/23/2011 2:47:45 PM : Start Price: $7.90 FC Score: +18.48

FC is an undervalued, underfollowed name that is in a period of transition. It is about to see rapid growth in FCF as their international licensee revenue continues to expand, which almost 100% of it translates into FCF. Furthermore, the company's Client Partners is expected to double and they represent an excellent ROI for FC.

The analyst from Credit Suisse, James DeYoung, sums up the opportunity well by saying,

“If there are accretive acquisitions to be made, that's a better use for the cash, I'm all for it. I'm just sitting here looking at a business that's trading at 3.7 times enterprise value to EBITDA on next year's numbers and 5.5 times free cash flow to enterprise value. So, just makes no sense when you look at the comps and we're growing faster than the comps."

Below, I have valued the International Licensee business all by itself. I think that it is worth the entire market cap of the company.. which means you get the rest of the business for free (the terminal rate assumes a 12.5X exit multiple, which is pretty conservative for a fast-growing licensee business). This is one of my highest conviction picks over the next three years.

      2010   2011   2012   2013   2014   2015   2016   
                           
   Growth Rate      12%   12%   12%   12%   12%   12%   
   International License Royalties   9.2    10.3     11.5     12.9     14.5     16.2     18.2    
   Tax Rate      40%   40%   40%   40%   40%   40%   
   FCF       6.2     6.9     7.8     8.7     9.7     10.9    
                           
NPV   34.18                        
Terminal    108.96                         
                           
Value    143.14