Educational Development Corporation (EDUC) operates two separate divisions, EDC Publishing and Usborne Books & More (“UBAM”), to sell th...

Weekly Superstock Scan 25 Jan 2016 - 29 Jan 2016

Educational Development Corporation (EDUC) operates two separate divisions, EDC Publishing and Usborne Books & More (“UBAM”), to sell the Usborne and Kane Miller lines of children’s books. These two divisions each have their own customer base. The EDC Publishing markets its products on a wholesale basis to various retail accounts. UBAM markets its products to individual consumers as well as school and public libraries. EDUC has two methods of marketing its books, the traditional sales method, and multi-level marketing.


Breakout from Strong Base with High Level of Attack

The stock formed a very strong multi-year base as the stock hardly move since 2014. Volume on a normal week is very low, with an average of 30,000 shares changing hands per week, or 6000 shares per day. It was only in September 2015 that the volume and price started to move. Price more than tripled from $5 to $17.59 in 3 months. Volume has also surged to a minimum of 150,000 per week in the previous few months.

Fundamental/ Stock Metrics

Surge in Sales and Revenue with Sequential Improvements

EDUC's business is seasonal in nature with the third quarter (the latest quarter reported) being the busiest quarter. The great result reported not only reflects the seasonality of the business, but it is a genuine improvement of the business as revenue and earnings more than doubled from the third quarter one year ago.

Revenue and earnings have also increased in the last four consecutive quarters, in-line with the number of sales consultant (members under the MLM program) under EDUC.

Successful Use of Social Media 

Internet sales is the main driver of the growth of EDUC as internet sales surged 782% in the latest quarter y-o-y. What sorcery is that? Basically there are three main reasons for the surge:
1) Increase in number of sales consultant
2) Discontinuation of sales of new book on Amazon - Previously sellers on Amazon were undercutting the other sales agents.
3) Facebook parties

The third point, despite unheard of, was actually the most important factor. So what exactly is a Facebook party? A search on Facebook will return you a long list of Facebook parties held by their sales consultants, and this blogpost shows a very detailed guide on how to host an Usborne Facebook Party.

In short, the sales consultant will create a Facebook event and invite their friends and/or relatives. During the time of the party, the host will interact with the people attending and reward them when they score the highest points by completing activities such as placing orders, inviting friend, or liking the host's Facebook page. During the party the host will also share recommendations of books and offer promotions for those books. At the end of the party, the host will try to recruit those people to join as sales consultants and hold their own Facebook parties.

Regardless of how unimaginable the idea may sound, the sales and earnings figures speak for themselves on how EDUC strike gold with this strategy.

Low Annualised PE

The annualised price-earning ratio derived from last quarter's earnings per share is less than 10. We have earlier established that the third quarter is traditional the busiest quarter, therefore the annualised P/E is not reflective of the actual valuation. I will estimate the actual P/E based on the current trend and price to be in the region of 13-15.

Easy Earning Comparison

The EPS for the fourth quarter of FY2015 is $0.02. When EDUC reports its earning next quarter, we should be seeing headlines reading earnings improved 400% - 800% y-o-y.

Risk Factors/ Things I do not like 

  • Illiquid stock - We do not know how long the surge in volume will last. Should volume dry up to the pre-Sep 2015 level, it will be extremely hard to offload the stock.
  • Ability to recruit new consultants - The growth of EDUC is dependent on the number of sales consultant. Churning is common within MLM firms and EDUC will need to find a way to recruit and train new consultants.
  • Limited market - The size of children's book market is limited. Many children has also started using iPad from a young age as a learning tool and this reduced the need for physical children's book.

Potential trade setup

The first entry for this stock will be in November last year when the stock first consolidate after the breakout. Now that the stock has pulled back, we are presented with another opportunity to enter the stock. For three weeks, price has failed to close below the 30 week moving average, which may serve as a support. However, the 10 week moving average which have served as a support for the past few months may now serve as resistance, which is not far away from the current price. For a trade with a better risk-reward ratio, I will wait for the stock to retrace to around the $9 level.


Updates on Previous Scans

DRD (Posted on 17th Jan 2016 Watchlist)
Price continue to move higher. Might have missed the move.

VRA (Posted on 11th Jan 2016 Watchlist)
Retested 10wMA with a hammer. Enter now with stop when price close below 10wMA.

IESC (Posted on 28th Dec 2015 Watchlist)
No reason to enter yet.

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