June 01, 2011 - 5:53pm EST by
2011 2012
Price: 14.20 EPS $1.00 $0.00
Shares Out. (in M): 20 P/E 14.0x 0.0x
Market Cap (in $M): 290 P/FCF 14.0x 0.0x
Net Debt (in $M): -163 EBIT 32 0
TEV (in $M): 127 TEV/EBIT 4.0x 0.0x

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Calamos Asset Management (CLMS) is a publicly traded company that has two main assets:

1) $49m cash and income taxes receivable ($2.41/share) and, as per the company, a tax asset worth NPV $46m at a 12% discount rate ($2.23/share).  These two assets together are worth $95m ($4.64/share).

2) 21.9% stake in the asset management company Calamos Holdings.  The asset management company has $39b AUM in various mutual funds and institutional accounts and TTM has $250m revenue and $133m EBIT.  CLMS's pro forma share of this (21.9%) is $29m EBIT ($1.44/share) or $0.90 operating EPS at 37.5% tax rate.  In addition, the asset management company has $310m in cash & investments in its own funds, which is net of the $49m cash held at CLMS and $92m debt.  CLMS's pro forma share of the parent net cash & investments is $68m ($3.32/share).

Add it up and you have a stable/growing asset management business with $8/share in net cash & investments and TTM $0.90 operating EPS ($1.00 operating EPS in 2011) trading at $14.20/share.  On 2011 numbers, that is 4x EV/EBIT or 6x earnings ex-cash.  My definition of operating EPS is pro forma EBIT * 37.5% tax rate / fully diluted shares, and does not include investment earnings on the company-owned portfolio.  I think fair value is probably closer to 12x operating EPS plus net cash, or $20/share on 2011 numbers.

There are no huge catalysts here, I think this is just a very cheap stock with a large amount of excess capital.  The company's cheapness is obscured by the unusual corporate structure (more below).  A quick glance at the financials does not reveal the significant cash & tax assets at the CLMS level.

The Calamos family owns the bulk of Calamos Holdings not owned by CLMS.  John Calamos, age 69 and founder of the company, is the CEO, Chairman, and Co-Chief Investment Officer.  Nick Calamos, age 48 and John's son, is the President and Co-Chief Investment Officer.

While the Calamos's have displayed a resistance to distributing the excess cash at the CLMS company level, the company pays a $0.095 quarterly dividend and I am hopeful they will pay out the excess cash at some point.  There is no good reason to hold it, but it may be awhile.  Management is attempting to grow the business through international expansion and has been modestly successful as of late, with net inflows increasing in the past few quarters ($538m in 2011 Q1).  I suggest reviewing the 2011 Q1 presentation for more details on the business and management's plans.


Business Description

Calamos Holdings = Entity that owns and operates Calamos investment funds.

Calamos Asset Management ("CLMS") = Publicly-traded entity that directly owns $49m cash and a deferred tax assets w/NPV $46, as well as 21.9% of Calamos Holdings.

Calamos Family Partners ("Calamos Family") = Private entity controlled by Calamos family that owns the rest of Calamos Holdings not owned by CLMS.

Calamos Holdings is a reasonably straightforward investment company that operates a series of mutual funds and institutional accounts.  The company has $24b in open-end mutual funds, $6b in closed-end mutual funds, $6b in Institutional accounts, and $3b in Managed accounts, for a total of $39b AUM.  Two mutual funds comprise 45% of the Mutual fund AUM: Calamos Growth and Calamos Growth & Income, and both have good long-term track records.

Calamos Holdings has a very strong balance sheet, with $29m cash, $92m debt, $5m in derivative liabilities, $349m investments in its own mutual funds, and $23m investments in its own hedge funds.  These funds pursue low volatility strategies and should display lower beta than the market.  Management partially hedges the investment portfolio by purchasing put options and selling call options.  The company claims that the purpose of its corporate portfolio is to seed its own funds, but there is clearly a large amount of excess capital invested in legacy funds.

The business is fairly straightforward, with the company earning ~70 bps on AUM.  The company has shown an ability to cut costs in a downturn to maintain high operating margins.  There is good data on the company's website about fund performance and inflows/outflows over time.  The company obviously took a large hit in 2008 but has recovered nicely.

Summary financials:

Revenue: 2007 - $474m, 2008 - $392m, 2009 - $282m,  2010 - $352m, 2011E - $373m

EBIT: 2007 - $173m, 2008 - $159m, 2009 - $98m, 2010 - $127m, 2011 - $148m

Operating EPS: 2007 - $1.16, 2008 - $1.07, 2009 - $0.66, 2010 - $0.85, 2011 - $1.01


Note on Tax Asset & Funky Corporate Structure

I am not a tax expert, but the following is my understanding based on the financials and communication with the Calamos finance department:

When CLMS went public in 2004, CLMS bought shares of Calamos Holdings from Calamos Family.  CLMS took a Section 754 election, whereby it stepped up the tax basis in the acquired shares which resulted in a deferred tax asset that allows CLMS to reduce its cash taxes by $8.3m annually for 15 years, through 2019.  This has resulted in a growing pile of cash at the CLMS level as the tax asset gets converted to cash over time.

CLMS "de-unitized" in early 2009, which means that it officially separated CLMS from Calamos Holdings, which was related to letting CLMS directly own the cash & deferred tax asset.  Nothing material changed regarding the underlying business, but the optical effect was a change in the CLMS reported fully-diluted sharecount from 97.5m shares (the total number at Calamos Holdings) to 20.5m shares (the 21.9% stake that CLMS owns).  CLMS has a 2 page note in the back of its annual report where it explains the dynamics.  The company first included this in its annual report in 2009.  Calamos management is frustrated that their market cap in most financial media represents only the 21.9% portion of the company and claims this hurts them when marketing to institutional clients.  They have made vague comments that they are looking to try and remedy this.

CLMS financials are reported combining 100% of Calamos Holdings plus the cash & tax asset at CLMS.  To get the pro forma financials for CLMS, the exercise is to subtract out the $49m cash and $46m net tax asset from the reported financials, multiply the remaining statements by 21.9%, and then add back the cash & net tax asset.


Distribution of excess cash to shareholders.
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