Creative Learning Corporation (OTC: CLCN) is a franchisor of educational and enrichment programs for children. With a market capitalization of just $21.5 million, the profitable and growing company offers investors a compelling value proposition.
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According to FRANdex, franchises outperformed broader indices in aggregate terms with 1% outperformance versus the S&P 500 and 0.8% outperformance versus the Russell 2000 in Q2 2014, based on the actual index levels without normalization over the past 29 quarters. The outperformance is likely due to predictable revenue streams and a low cost structure.
Government grants and incentives are also driving demand for STEM (Science, Technology, Engineering and Math) programs to help improve math and science test scores at state and federal levels. For example, the 21st Century Community Learning Centers Federal After-school Initiative has grown from $40 million in 1998 to more than $1.15 billion in 2012, providing after school education programs.
In this report, we’ll take a look at Creative Learning’s unique franchise model, improving financial performance, and why investors may want to take a closer look at the stock.
Compelling Franchise Model
Creative Learning’s BRICKS 4 KIDZ® and Challenge Island® franchises are designed to teach principles of engineering, architecture, and physics to children ages 3-12+ using LEGO® Bricks. The company provides classes, special events programs, and day camps that enhance traditional school curriculums, encourage imagination and build self-confidence.
Since selling its first BRICKS 4 KIDZ franchise in September 2009, the company has signed on 484 franchisees operating in 40 states, the District of Columbia, Puerto Rico, and 23 foreign countries. The success led management to start Challenge Island in 2013, which reached eighteen franchisees last month, and Sew Fun Studios, which will be rolled out next month.
The company’s flagship BRICKS 4 KIDZ franchise has drawn praise and accolades throughout the industry. In fact, Entrepreneur Magazine listed the flagship franchise as the #1 Children’s Enrichment Franchise in the country for 2014. With one successful launch under its belt, management aims to replicate the success with its other two franchises moving forward.
Strong Financial Condition
Creative Learning’s franchise business model has generated strong and growing revenues over the past five years. As its two new franchises gain traction, the company is well positioned to grow its top-line results over the coming years. Containing costs should also keep the bottom-line intact as margins continue to expand with scaling revenues.
Last quarter, the 88% growth in franchises led to a 131% increase in revenue, and a swing in net income from a loss of $15,000 to a gain of $296,800. The company’s balance sheet also strengthened with $2.59 million in cash and a current ratio of 3.7x. Long-term debt of just $92,900 equates to a relatively safe debt-to-equity ratio of only 0.03x.
On a top-line basis, the company’s revenues have been growing at a compound average growth rate (“CAGR”) of more than 150% over the past five years. These figures are driven by the firm’s largely successful franchise model, which drives high-margin recurring revenue. In fact, its operating margins have been steadily growing to current levels at 25.86%.
Creative Learning’s rapid growth rates have led to a price-earnings to growth ratio of 0.12x, which is significantly lower than a fair value of 1.0x. Assuming a forward five-year top-line growth rate of just 30%, a fair price-earnings multiple might be close to 30x given a PEG ratio of 1.0x, which means that the stock’s fair value could be closer to $2.55 per share.
Investors in educational or franchise companies, such as LeapFrog Enterprises Inc. (NYSE: LF) or McDonalds Corporation (NYSE: MCD), may want to take a closer look at the stock given its significant growth prospects and unique franchise business model.