Educational Development Corporation (EDUC), with its principal office in Tulsa, Okla., is the sole U.S. distributor of a line of children's books produced in the UK by Usborne Publishing Limited. It operates two principal divisions: home business and publishing. The home business division distributes books through independent consultants who hold book showings in individual homes, and through book fairs, direct sales and Internet sales. The home business division also distributes these titles to school and public libraries. The publishing division markets books to book stores, toy stores, specialty stores and other retail outlets. The home business division and publishing division represented 58% and 42% of revenues in fiscal year 2012, respectively. EDUC is also in the direct publishing market through its ownership of Kane/Miller Publishers.
EDUC is currently trading at a trailing 12 months P/E of 10.67 and a trailing 12 months EV/EBITDA of 7.10. Current P/B valuations at 1.15x represent a 14% discount to its five-year average P/B of 1.34x. EDUC achieved a ROE of 10.6% for the trailing 12 months and a five-year average ROE of 11.3%.
Financial and Business Risks
EDUC has a strong financial position with a very low gross debt-to-equity ratio of 5.6%. EDUC locks up the bulk of its working capital in inventories. In fiscal year 2012, inventory turnover was at a mere 1.06x.
I bought many Usborne books when I was young. However, I wonder how many of the kids in the new generation read books; at least I am sure they know how to download apps form the App Store using an iPad. That probably sums up the huge challenges that EDUC faces.
Business Quality and Capital Allocation
EDUC has a long history of profitability and positive cash flow. It can sustain planned operating levels with minimal capital requirements. EDUC is profitable for every year in the past decade and is free cash flow positive for 9 out of the last 10 years except for 2004. Historically, capital expenditures have never exceeded 1.5% of sales.
Like all traditional media players, EDUC is trying to break into new media, and is in the process of implementing electronic publishing capabilities to enhance its existing products. On Oct. 13, 2011, EDUC signed a Stock Purchase Agreement to acquire an 11% position with Demibooks Inc. for an initial investment of $250,000. The Stock Purchase Agreement allows for an additional $250,000 investment, resulting in a cumulative position of 18%, upon the completion of specified milestones. During the first two quarters of fiscal year 2013, EDUC invested an additional $129,400 in Demibooks Inc. EDUC plans to utilize Demibooks' Composer platform, a code-free way for publishers and self-published authors and illustrators to create interactive books for the iPad on the device itself, to create its proprietary interactive products.
EDUC has paid dividends in every single year since 1997, and currently sports a dividend yield of 11.8% with a corresponding dividend payout ratio of 126%. Since 2010, EDUC started paying dividends on a quarterly basis. EDUC is a dividend grower, having grown its dividend by a 5-year CAGR and a 10-year CAGR of 19% and 28%, respectively. EDUC's board of directors has adopted a stock repurchase plan in which it may purchase up to a total of 3 million shares. It repurchased 10,200 shares at a cost of $49,100 during the year-to-date period ended Aug. 31, 2012.
There are two conditions for owning the stock. First, you should be an income-oriented investor with a long-term investment horizon to fully capitalize on the high dividend yield. Second, you should have some form of faith in the future of books, especially children's books produced by Usborne Publishing Limited.
The author does not have a position in any of the stocks mentioned.