www.globeandmail.com

The Globe and Mail
leaftheglobeandmail

  Will Franklin Covey prove a highly effective purchase?

BENJ GALLANDER and BEN STADELMANN

Friday, November 26, 2004

Over the past year, six stocks were acquired for the Contra portfolio: Analysts International, Cygnal Technologies, Leitch Technology, Penn Treaty American, Theragenics, and our biggest purchase (a drumroll please): Franklin Covey.

Franklin Covey is a company that gains part of its claim to fame from its vice chairman, Stephen Covey, a Mormon and former Brigham Young University professor who now makes millions on the lecture circuit and who wrote the book The Seven Habits of Highly Effective People. Since it was published in 1989, more than 15 million copies have been sold, garnering Covey a large following. Now on the bookshelves is The 8th Habit: From Effectiveness to Greatness. The essence of the latter work is for people to "find your voice and inspire others to find theirs," and then to align these voices with the voice of the enterprise.

Franklin — as might be imagined, given the nature of Covey's primers — aims to help people and organizations to reach their potential. This is done through both educational and training programs, along with products such as binders, Personal Digital Assistants, and planners. Unfortunately, given the difficulties that the company has had over the previous decade, with the stock price collapsing from over $40 in 1994 to a low of 65 pennies in April 2003, one might conclude that "he who can, does, while he who can't, teaches."

Management has been trying to fix corporate troubles for years. Their efforts have included eliminating unprofitable products, selling and closing non-strategic business units, outsourcing, reducing operating costs ... the whole nine yards of corporate renewal. The process has been protracted, similar to going on a lifelong diet.

Our analysis suggests that the famine will soon end for this company. The balance sheet is squeaky clean, with negligible debt. Book value is around $9 a share with none of this goodwill. However, about half are intangible assets which, true to form, remain less than tangible. Sales, which surpassed $500 million at the millennium, have been cut in half. The decline has not been stopped, but the spiral is slowing. In addition, while the firm continues to lose money quarter after quarter, the bottom line is moving in the right direction, and cash flow has turned positive.

Fourth-quarter and annual results will be reported next week, and our best estimate is ongoing progress. Nevertheless, it is unlikely that the company will be profitable before 2006, and to achieve this, revenues will likely not only need to stabilize, but jump.

Our purchase last December was at $1.55, with a target price of $11.24 — a long way from the current level around $1.75. The fact that Covey's latest book is No. 1 on Wall Street can only help the corporation, but whether his magic elixir works better on paper than in practice is still to be seen.

Given our stake in this business, we are anxious to see if the proof of the pudding is in the eating. The stock is tucked away for what is anticipated to be a long, fortuitous ride.


back