John Lewis of Osmium Partners presented his in-depth investment theses on Spark Networks (NYSE: LOV), Franklin Covey (NYSE: FC) and Redbubble (ASX: RBL) / Leaf Group (NYSE: LFGR) at Best Ideas 2018.
Spark Networks is an orphan with low following after several years of disappointing results. In November, the company reverse-merged with Elite Singles, and John believes a substantial transformation is at hand. Insiders own ~85% of equity and a former insider recently filed that he personally bought 9.4% of outstanding shares. The new Spark Networks will see revenue increase ~5x from $25 million to nearly $120 million, based on company guidance. This increased scale should generate $20 million in adjusted EBITDA, also based on guidance, and a market cap of $175 million. The share count post reverse stock split is 13.4 million. The business has significant global scale, operating in nearly thirty countries, with a portfolio of premium subscription brands and a low-cost opex structure out of Berlin. John believes the business is poised to generate high returns on capital and the franchise has substantial reinvestment opportunities to grow shareholder value. If the company hits $2 per share in adjusted EBTIDA (a close proxy to free cash flow), the business may be worth $30 per share.
Franklin Covey: Digital transformation is deep in process, yet the market valuation fails to recognize this, as most of the long-term shareholder base is overly focused on the old delivery model. Franklin Covey’s All Access Pass grew revenue from $23 million to $63 million on a year-over-year basis. John expects this to grow $50+ million a year given the current business model. AAP has 90% recurring revenue, and management has guided for this business to have 30-40% EBITDA margins at scale. As this business continues to scale, FC revenue streams will consist of royalties (15% of revenue) from international licensees, the “Leader in Me” K-12 education business with a five-year 15% CAGR in revenue and 10% EBITDA margins, and the direct offices business (includes AAP). The traditional delivery format, plus the “Leader in Me” business, and international licensee value comes to nearly $20 per share, and AAP is valued at only $2 a share or $25 million, which John thinks is worth closer to $250+ million. John estimates that FC is worth $32-40 per share.
Redbubble / Leaf Group: For several understandable of reasons, investors have failed to discover two fast e-commerce platform businesses. Redbubble trades in Australia but 93% of revenue is in the U.S. and Europe. The business is a two-sided platform growing 30+%, with 25% incremental EBITDA margins. Redbubble has a five-year organic top-line growth rate of 50+%. The CEO owns nearly 30% of the equity and the company has a strong balance sheet, with $27 million in net cash. Leaf is a busted IPO that has slowly rebuilt itself with a solid team, including the CEO who was formerly CEO of Ticketmaster. Both companies should reach steady-state consistent profitability in 2018 (both were marginally cash flow positive in Q3 CY17). Both companies trade at sharp discounts to better-known public peers such as ETSY. RBL/LFGR trade at a ~75% discount to ETSY on an EV/sales basis, yet RBL combined with LFGR marketplaces platform would be nearly 67% the size of ETSY. Finally, John believes Leaf’s media business segment plus cash is worth $8-10 per share to a strategic buyer.
About the instructor:
John Lewis is the Managing Partner and Chief Investment Officer at Osmium Partners, LLC., a value-based long-short equity fund founded in 2002. Over the past 15 years, Osmium Partners has invested in undervalued US-based small-capitalization stocks with a focus on our proprietary process call the Osmium Eight. As engaged and constructive investors, Osmium works to drive long-term shareholder value. Mr. Lewis has served on two public boards in a board range of capacities including as Chairman of the Nominating & Governance, Compensation, Audit, M&A, Special Committee, and Risk Management Committees. Over the last four years, Osmium has appointed over 12 directors to four public companies. Mr. Lewis was Director of Research at Retzer Capital and an Equity Research Analyst at Heartland Funds. He received a BA from the University of Maryland and an MBA from the University of San Francisco.
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