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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  • Travel
  • Buybacks
  • Activism
 

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

    sort by   Expand   New

    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

    Messages


    SubjectEPAX thoughts
    Entry01/29/2013 11:00 AM
    Memberclancy836
    I published an EPAX writeup on SA Pro last month; I guess I'm not allowed to post it here unfortunately. On valuation it makes many of the same points and I won't rehash that here; though I'm also hoping the activist shareholders may potentially catalyze a sale of bookrags.com, especially if they can attract a "social media" multiple. With $37MM in deployable cash and a potential $20MM-$40MM from real estate and web assets, the valuation of the core business is certainly undemanding even after the recent rally.
     
    Apart from valuation of the assets, I'd emphasize that from 2002 through 2009 this business consistently earned enviable returns on equity ranging from 22% to 42%, and enjoyed net margins of 18% to 30%, making its current undervaluation even more striking if even the slightest reversion toward historic levels of profitability can eventually be achieved.
     
    To confront some of the core issues with returning to top-line growth and this historic record of strong profitability: in the past, their marketing strategy centered on direct mail which sent packets to students emphasizing they were personally "nominated for the honor" of being a Student Ambassador, which helped drive conversions as students felt honored to be selected. In fact they were being too indiscriminate in sending out blanket solicitations to commercial direct mail lists, including several embarassing cases of "nominating" a deceased student. They have since had to soften their direct mail language, which I think is in large part behind their decline in conversion rates.
     
    I would think an appropriate response would be to leverage their relationships with local teachers, and target their direct mail solicitations to a targeted list of students who in fact are nominated by educators as students who are appropriate candidates for the trip and are likely to go. This would entirely avoid the expense and poor conversion rates of using commercial lists and go a long way toward enhancing their reputation. If managed correctly, their long-term relationships with local educators can be a hugely valuable "moat" and intangible asset that helps support their historically strong RoE.
     
    The current CEO, Jeffrey Thomas, has been in place since 2001; and somewhat unusually Thomas's wife Margaret is the current VP of marketing. If margins and revenue do not significantly improve toward their historic means by the end of this year, I expect the newly energized activist Board will not hesitate to replace either or both of Margaret and Jeffrey Thomas with experienced outside management to help guide the business back toward its longstanding historic track record of impressive profitability, and I believe the announcement of such a move could cause the stock to rally significantly.
     
    As an additional recent headwind, advance bookings through year-end 2012 were collected at the height of the fiscal cliff uncertainty, making families reluctant to commit months in advance to future discretionary travel; at the next quarter I expect bookings from late 2012 will continue to be slow which could again pressure the stock in the short term. I expect this should improve somewhat going forward with a return of consumer confidence; over the long term a lot depends on an appropriate marketing strategy enabling the business to return to historic strong RoEs; this is not a foregone conclusion but is certainly something the new activist shareholders also will be strongly incentivized to make happen.

    SubjectRE: EPAX thoughts
    Entry01/29/2013 12:17 PM
    MemberGriffin
    thanks for the interesting write-up and thoughts
     
    1/ can you comment on competitors and changes in competitive position?
     
    2/ you mention that G&A is 20/25Mio higher now than in the period 2000-2003 when the number of delegates was the same. The 5M cost saving in 2012 seems modest in relation to these figures. Can you provide more detail  on the changes in the cost structure and the probability of further substantial cost savings?
     
    tx
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