FRANKLIN COVEY CO (FC) stock intrinsic value fair value estimate & owner earnings analysis

Franklin Covey sells leadership, culture and education training, mostly on multi-year subscriptions: the All Access Pass to companies and government agencies, and Leader in Me memberships to schools. It needs little capital, carries no borrowings after repaying its last term note and ending the long-term lease on its old Utah headquarters in June 2025, and its customers pay in advance, so deferred revenue (about $96 million at May 2026) funds the business. How we measured earnings. We take operating cash flow, remove swings in working capital (which are large here because annual subscriptions are billed up front), subtract stock compensation, and subtract the capital needed to stay current. That capital includes not just equipment but the curriculum development the company capitalises, because refreshing content is a real, recurring cost of keeping the product saleable. Only spending in excess of what revenue growth required is treated as optional. On that basis owner earnings were about $17 million in fiscal 2021, $29 million in 2022, $22 million in 2023, $27 million in 2024 and only $1 million in fiscal 2025 (year to August). Because the content is refreshed out of these earnings, we have not separately run down the value of acquired intangibles. What changed. Revenue fell 7% in fiscal 2025 to $267 million as US federal spending cuts, tariff uncertainty and a self-inflicted overhaul of the North America sales force hit new sales and renewals; the company spent $6.7 million on restructuring and $2.1 million leaving its old campus. The nine months to May 2026 brought revenue down another 2% to $191 million, a further $5.7 million of restructuring, and owner earnings near zero, and management cut its full-year revenue range to $260-267 million, citing a delayed large enterprise contract and a state-funded education contract lost to budget cuts. Two consecutive weak years are enough to lower what we treat as normal: we no longer assume the 2022-2024 level of roughly $22-29 million returns on its own. Against that, there is real evidence of a turn in billing: subscription and contracted-services invoicing rose 17% in the May 2026 quarter, North America invoicing is up 6% year to date, and enterprise deferred revenue is up 15% year over year. Contracted but not yet billed revenue, however, slipped slightly to $61 million from $62 million, which tempers how much of that we credit. Base case: owner earnings rise from roughly breakeven in fiscal 2026 to about $8 million in fiscal 2027 as restructuring costs stop and already-billed subscriptions are recognised, then about $13 million and a sustained $15 million a year thereafter, with no further growth credited. $15 million is below the 2021-2025 middle because revenue is about $20 million lower than its 2024 peak at a 76% gross margin. The recurring subscription base and a 30-year content library are what keep these earnings going beyond ten years. Business worth about $242 million; no debt; about $5 million of cash beyond operating needs; about $21.50 a share on 11.45 million shares. Bear case: two more thin years ($3-4 million), a modest recovery to $6 million, then a corporate training downturn like the 2020 shutdown, when revenue fell 12% and owner earnings dropped to $6 million from $9 million, or the 2017 transition year when they were negative. We model two years of small losses, a recovery only to $9 million, and then a fade to nothing over the following decade as cheaper digital and AI-delivered training erodes pricing. The company can carry the loss years from cash and its undrawn $62.5 million credit line. Business worth about $48 million, no debt, about $4.60 a share. Bull case: the new sales model works as the invoicing trend suggests, earnings reach $10 million in 2027 and $18 million in 2028, and settle at $25 million, the level the business actually produced in 2022-2024. No market expansion or margin gains beyond that are assumed. Business worth about $396 million, about $35 a share. Margin of safety price: $8.00. How sure are we of the earnings level? Not very. The business earned $22-29 million a year for three years and then almost nothing for two, partly from one-time restructuring, but also from lost renewals that may not come back. The worst plausible outcome is a shrinking business whose content becomes a commodity; its structure would survive that, because it has no debt, collects cash in advance and needs little capital, so the risk is slow erosion rather than a wipe-out. If we are wrong about the two things most likely to be wrong, that normal earnings recover to $15 million and that they hold for decades, and the business instead settles near $9 million with a slow fade, the shares are worth roughly $10-12. The price assumes a three-to-four-year holding period for the recovery to show up in reported results; the company pays no dividend but has retired about a fifth of its shares since 2021, which raises each remaining share's claim over that period. From $8.00, a recovery only to about $10-12 million a year of owner earnings within four years would imply the required return, while the no-debt balance sheet limits the damage if the bear case unfolds. Our previous figures were built on a different earnings measure and are not directly comparable; the main business change since then is a second weak year and a lowered revenue outlook, offset by the first clear evidence of rising subscription billing.