Educational Development Corp (NASD:EDUC); My Fair Value Estimate:
o My Estimate of Fair Value (MFV)
o Return on Invested Capital (ROIC)
o Liquidation Value = Tangible Book Value (TBV)
o Book Value (BV)
o Operating Income (OI)
o Enterprise Value (EV)
o Price-to-earnings ratio (P/E)
Educational Development Corp is a direct sales educational publishing company. To me, that’s not particularly relevant. What’s of greatest relevance is the differential between its market value and MFV. But, before those calculations, I measure the stock via a scorecard to highlight indicators that might make the stock more or less likely to be a winner. Correspondingly, pros and cons as I see them.
·Market Cap is <$250mm
o I may have a counterparty advantage from these first two, e.g. institutional investors may have rules preventing the purchase of lower priced, smaller Market Cap stocks. If so, I’m competing against fewer buyers to purchase shares, but may have more buyers to sell shares to if the share price and/or Market Cap increase.
·The % of shares short is <5%
o Shorts take greater risk than (non-margined) longs, so I assume they’ve done some research before betting against a company
·The company’s float is between 4 and 12mm shares
o This range provides enough liquidity for my purposes, but is small enough that the stock might experience a parabolic move upward on significant buying interest
·Corporate insiders own a significant % of the company
·The company does not have options, forcing those who want long exposure to buy shares
·Shares trade above the 200-day simple moving average
o This shouldn’t matter, but enough people think it does that I give it a little weight…
·The company’s balance sheet seems good, and BV has grown nicely over 5 years
·Debt/MC is >100%
·The company’s OI is negative over the last twelve months
Those pros and cons and—more importantly—the company’s average ROIC (~11% over the last 10-years) make it seem unlikely that the company has durable competitive advantages. So, I deem the company not good quantitatively and value it relative to its liquidation value, TBV of $5.68. Given the not good designation, the company’s seemingly good balance sheet, and 5-yr average multiple of BV x 2.5**, I think TBV x 1.5 is a reasonably conservative fair value, which equates to MFV of $8.53.
At a recent price of $3.79, the differential between market value and MFV is 125%, thus I think shares are undervalued.
Conclusion: I own shares. OI and the share price have been incredibly volatile, so this company may only be suitable for a small position. But, given how undervalued it is and how much is has grown BV historically, I plan to hold shares until it trades >=MFV.
My positioning: Long shares
For more information about how and why I designate companies not good read here: (https://www.veriteventures.com/post/how-i-value-most-assets-companies)
*Post prepared using data as of 02/17/23
**I’m using the company’s historical Book Value multiple as a proxy for Tangible Book because TB is <=BV and BV multiples are more readily available from data providers.
The information in this post has not been audited and accuracy is not guaranteed. The post is for informational purposes only and is not investment advice. Consult a financial professional before making investment decisions. The author’s opinions and positions may change subsequently, without notice.