AMBASSADORS GROUP INC EPAX
January 28, 2013 - 7:50pm EST by
rab
2013 2014
Price: 4.95 EPS $0.26 $1.00
Shares Out. (in M): 18 P/E 19.8x 5.0x
Market Cap (in $M): 87 P/FCF 20x 5.0x
Net Debt (in $M): -52 EBIT 8 35
TEV ($): 36 TEV/EBIT 4.0x 1.0x

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Description

Founded in 1967, Ambassadors Group (EPAX) is one of the leading student travel companies in the United States.   Spun out from parent company in March 2002, EPAX has 45 years of experience organizing student and professional education programs (think student travel to Europe and Asia for 2 weeks to 6 weeks).  EPAX organizes and runs trips to areas such as Europe, Australia, China, Japan, South Africa, India, Rwanda, Costa Rica, the Galapagos Islands and Antarctica.   Europe is 2/3 of trips and South Pacific/Asia is remaining 1/3. While not capital intensive, the business does require established relationships with public officials, organizations and residents in countries.  EPAX has a license agreement with “gold standard” People to People” organization and boasts a scandel-free, high customer satisfaction history.  EPAX also owns BookRags (<10% of profits), an education-oriented research website that is essentially a modern day "cliff notes."
 
Operating results depend on the number of travelers that attend the company’s programs (delegates), the fees the company is able to charge per traveler (gross revenue) and the direct costs associated with the traveler’s itinerary including air fare, hotel, meal, other. Ambassadors Group operated very well from 2001 to 2007 (even during the turmoil of 9/11).  Beginning in 2008, operating performance began to deteriorate, largely due to less discretionary income, higher unemployment, softer economy in the company’s target market.  As revenues declined, the company was extremely slow to react and did not cut marketing costs or adapt its marketing approach.   Another area that was neglected was general and administrative expenses.  When times were good, the company decided to spend $20 million on a new headquarters facility in Spokane, Washington. The company is the only occupant and only occupies approximately 20 to 30 percent of the building, resulting in significant excess operating costs, ownership costs, etc.

In December 2011, Lane Five Capital Management, a large institutional shareholder run by Lisa Rapuano (Bill Miller’s former right hand), filed a 13D requesting board seats, better capital allocation and cost management.  Several other large institutional owners (Bandera Partners, Peter Kamin) also got on board with Lane Five’s efforts.  Subsequently:

  • February 2012: the company appointed New Jersey Pension CIO Timothy Walsh to the board (he manages $73bn in AUM). 
  • April 2012: appointed Lisa Rapuano (Lane Five Capital) and Peter Kamin (formerly of ValueAct Capital) to the board. 
  • April 2012: listed corporate HQ building for $13.3mm
  • June 2012:  The former Chairman of the Board stepped down
  • October 2012: announced return of capital of $25mm over two years ($8.8mm special dividend + $16mm share repurchase + ongoing dividend).
Despite annual student counts hovering near 15-year lows, the company continues to be FCF and EPS positive and has additional room to make cost cuts, if necessary.  Rather than view this as a cost cutting story, EPAX seems to have significant revenue growth potential if one or more of the following occur:
  • Increased discretionary spend (lower unemployment, better housing markets, etc) translate into more student travel;
  • Social marketing and local initiatives (i.e., Facebook, Twitter, etc) translate into new student interest;
  • Tweak in strategy to include "teacher affiliations" similar to EF Tours could stimulate student interest. 
The business has enormous operating leverage.  An additional 2,000 students = $0.10 of EPS all else unchanged.  The bottom line is that EPAX presents a fairly low downside profile assuming no improvement but would seem likely to have significant upside based on the following changes going forward: 

More Efficient Marketing

  • Overall strategy is to make upfront fixed marketing costs more effective. 
  • Shareholders (and now management) believe that new customer cultivation requires a blend of direct mail and social media (the younger generation no longer reads much direct mail).  
  • A social media marketing strategy expose the company’s services to more customers while also lowering the cost of acquiring new delegates.

Lower General & Administrative Expenses

  • G&A from 2000-2003 was less than $30mm per year on same number of delegates.
  • G&A is now $50 to $55mm.  $5mm of expenses coming out in 2012 with more to be removed in 2013.  Selling corporate HQ or leasing empty space would save $0.5 to $1.0mm. 

Prudent Capital Allocation

  • In April 2012, the company listed its HQ building for $13.3 million.
  • Committed to returning $25mm of capital to shareholders within next two years via:
    • Special dividend of $0.50 per share (went ex-dividend on 11/2/12).  $8.8mm
    • $16.2mm share repurchase – would retire approximately 3.5mm, or 20% of O/S shares
    • Maintain quarterly dividend of $0.06 per share; $0.24 annually à 5.3% div yield

Better Governance

  • Two large shareholders now have board seats
  • All directors elected annually

 

How the Business Works

In the summer months, the company historically sends out letters via direct mail on People to People letterheads to families with certain demographics.  In the fall and winter, the company holds informational meetings for students and adults who have responded positively to the marketing letters. Then, from this group, some of them are enrolled in the travel programs. Finally, in the summer months, delegates, as the students are called, travel the world while the company starts preparing for the next season by sending out travel invitations.  Capex is very low (<$3-$4mm per year). 

Competitive Advantage

Ambassadors Group licenses the People to People brand, which is a private, non-profit organization dedicated to the promotion of world peace through cultural exchange. The organization was founded in 1956 by Dwight Eisenhower.  The company pays royalty fees to People to People on a per-traveler basis. Because of this affiliation with the People to People organization, potential travelers are more likely to choose the company’s travel programs over the competitors’ programs because the People to People brand gives it credibility, trust, and recognition.

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

More Efficient Marketing

Lower General & Administrative Expenses

Prudent Capital Allocation

Better Governance

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