|Shares Out. (in M):||9||P/E||0||0|
|Market Cap (in $M):||149||P/FCF||0||0|
|Net Debt (in $M):||-6||EBIT||0||0|
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I am long Collectors Universe (NasdaqGM:CLCT), which provides authentication and grading services to dealers and collectors of coins, trading cards, event tickets, autographs and historical and sports memorabilia (“collectibles”). Note this is a thinly traded stock (~$1mm ADTV), so this idea is best for smaller accounts or PAs. Hxf82’s write-up in 2009 provides a good overview of CLCT, which primarily generates revenues from the fees paid for its authentication and grading services. CLCT operates through three segments: Coins; Trading Cards and Autographs; and Other High-End Collectibles. The company has a fiscal year ending June 30th. CLCT is the market leader and authenticated 3.1 million coins in 2017, up from 2.4 million in 2016 and 2.1 million in 2015. The company authenticated 1.5 million trading cards in 2017, up from 1.3 million in 2016 and 1.3 million in 2015. The company authenticated 300k autographs in 2017, compared to 450k in 2016 and 435k in 2015. The insured value of all of these collectibles totaled $2.3 billion in 2017, $2.1 billion in 2016, and $2.2 billion in 2015.
CLCT’s authentication and grading revenues consist of fees ranging from $1 to over $10,250 per item, based primarily on the type of collectible authenticated or graded, the turnaround times and the specific service selected by the customer. CLCT charges higher fees for faster turnaround times. Fees are generally not based on the value of the collectible, except for special coin services sometimes requested by customers, for which CLCT charges supplemental fees that are based on the value of the coin. In 2017, CLCT’s authentication and grading fees, per item processed, for all of its businesses averaged $12.82, and CLCT’s coin authentication and grading fees ranged from $1 to over $10,250, and averaged $14.92 per coin.
Since customers are not very price sensitive given the value proposition CLCT offers them is very strong (i.e. small fee to authenticate and grade a collectible, which greatly increases its value in the eyes of other buyers), CLCT is able to consistently generate 60% gross margins. EBITDA margins are also high, in the range of 18-23%. The balance sheet has a net cash position of $6mm, relative to the $149mm market cap. The company has very little capex, allowing it to generate substantial FCF, which over the past several years has been used entirely to pay dividends. For example, in fiscal 2017, the company generated $70mm of sales, $43mm of gross profit, $14mm of EBITDA, EPS of $0.99, cash flow from ops of $12.2mm, capex of $1.4mm, resulting in levered FCF of $10.8mm, of which $11.9mm was paid to shareholders as dividends (cash from the balance sheet was partially used to fund the dividend).
For several years, CLCT has been paying a slightly oversized dividend, which was greater than FCF each year, resulting in the company’s cash balance slowly declining over time, from $19mm at the end of 2013 to $9mm at the end of 2017. Given FCF has been fairly steady (i.e. not growing large amounts each year), some investors wondered if management might eventually have to cut the dividend. Well, that’s exactly what happened after the recent earnings release. CLCT just had a pretty bad quarter (I’ll explain why it’s not a big deal below) and announced it was going to cut the dividend by 50%. In early February, this caused the stock to plummet from $26.50 to $18 in one day, or a 32% decline. The intrinsic value of the company did not decline 32% overnight, but rather income investors, seeing the dividend cut, rushed to sell. Before the earnings release, CLCT was paying a quarterly dividend of $0.35/share, or $1.40/share annually, which represented a 5.3% yield. Going forward, the annual dividend will be half or $0.70/share, which at the current price of $16.55 represents a 4.2% yield, which we think is attractive.
Here is a summary of the most recent quarter’s earnings. Revenue was $14.1 million in the quarter, as compared to $17.9 million last year, a decline of 21%. However, for the six months ended 12/31/17, revenue was unchanged at $33.8 million as compared to $33.6 million in the same six months last year. Coin service revenues declined by $4.4 million, or 34%, during the quarter and by $0.9 million, or 4%, for the six months ended 12/31/17. China coin revenues decreased by $2.2 million, or 59%, during the quarter, which the company believes was primarily due to seasonality and period-to-period volatility seen in the business. For the six months ending 12/31/17, China revenues actually increased by $1.0 million or 21%. Revenues from the U.S. coins business declined by $2.3 million, or 27%, during the quarter and by $2.2 million, or 13%, in the same six months last year, reflecting a general slowness in the coin market in the most recent quarter. CLCT’s gross margin was 54% during the quarter and 59% during the six months ending 12/31/17, as compared to 64% and 62% in the same respective periods of the prior year. Those declines in profit margins were primarily attributable to the decrease in coin revenues in the most recent quarter, as a significant proportion of direct costs are relatively fixed in the short-term. Operating income was $0.2 million during the quarter and $4.8 million during the six months ending 12/31/17, as compared to $4.5 million and $7.3 million, respectively, in the corresponding periods of the prior year.
CLCT’s CEO explained that the quarter ending 12/31 has always been the slowest of the year due to the seasonality of the business, but that the most recent quarter was particularly slow, due to a decrease in coin submissions in China, weakness in the vintage coin market and a substantial decline in modern coin sales at the U.S. Mint.
After reading the earnings report, my initial question was (a) did the entire industry face weakness during the quarter or (b) was it just CLCT who had a bad quarter, and if so, is that a sign CLCT, the market leader, is losing share? While none of the other graders are public, I found the below blog from rare coins dealer Legend Numismatics (based in New Jersey), which had two interesting posts.
The first one, http://www.legendnumismatics.com/market-reports/farwell-2017/, which was written on 12/22/2017, states: “We can not remember in our 40 years of being full time coin dealers a more turbulent year. What makes it even more crazy-Legend Numismatics was close to a record year of sales. Every month was feast or famine. In December, we totally ran out of coins and our sales slumped to a horrifying number UNDER $1 million dollars.” Therefore, the volatility of sales between CLCT’s most recent two quarters (the first of which was very strong and the second of which was weak) was also seen by other players in the industry and was not unique to CLCT.
The second post, http://www.legendnumismatics.com/market-reports/bull-market-beginning/, which was written on 2/3/2018, states: “After all the stress and worry, we ended up having a far better then expected January. From what we heard from our peers, most did as well. The near shut down of Nov-Dec is still fresh in everyone’s mind. So it would not have taken much to recover-but everyone’s numbers (including ours) were still stronger then expected.” Assuming this is an industry phenomenon, then CLCT should also be experiencing a recovery. The article goes on to make an interesting connection between the stock market and coin market that “The last time this happened-2008 when the stock market really melted down, the rare coin market went on a 2-3 year tear upwards. We started to see really big mega collectors appear all over. Every day collectors entered in throngs. We see no reason this stock market shake out will not lead to a strong bull market in rare coins. The party is now officially over for stocks and the crowd will start to park their money elsewhere. Hard assets ALWAYS see a share of the money. Real quality rare coins are cheap today.”
So what is CLCT worth today? CLCT continues to have no analyst coverage, so there are no consensus estimates to analyze. CLCT currently trades at 11.5x LTM EBITDA, below its 5-year average trading multiple of 12.0x. In addition, CLCT currently trades at 18.8x LTM P/E, below its 5-year average trading multiple of 21.9x. For the LTM period, CLCT generated $12.2 million of cash flow from ops, and had $3.4 million of capex, resulting in levered FCF of $8.8 million. Adjusting capex for the one-time move to the new headquarters, which increased capex above the historical average of $1.4 million, would result in levered FCF increasing $2.0 million to $10.8 million. Going forward, the new corporate tax rate will free up an additional ~$1 million of cash, resulting in levered FCF of ~$12 million going forward. This level of earnings assumes that the industry had a hiccup in the most recent quarter, and that business does not further decline. Based on $12 million of normalized FCF, the stock is currently trading at 11.5x FCF. We believe that as a market leader with high margins, strong returns on capital, high free cash flow conversion and a shareholder friendly management team, CLCT should trade closer to 15x FCF, or a 6.7% FCF yield. This implies a target price of $21.60 for 30% upside. Note that over the past five years the stock has traded at an average FCF multiple of 17.7x and even traded as high as 30x FCF in 2016, so our target multiple of 15x does not feel aggressive. Lastly, given CLCT is a mature, strong cash flow generator, with a relatively small market cap, the company could be an attractive LBO candidate, resulting in a potential take out scenario.
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