Calamos: It's Delightful, It's Delovely, It's Delevered

Calamos (CLMS) provides money management services and investment advice to institutional and individual investors through closed-end and open-end mutual funds and through separately managed accounts. They deal in equities, fixed income and convertible securities.

The disastrous stock market of 2008 took a heavy toll on CLMS’s assets under management, earnings and its reputation. Debt covenants required a severe delivering in the fourth quarter as NAV fell and CLMS paid down $400 million of $525 million in total debt by selling off portfolio holdings and retiring their debt early. Employee headcount was reduced and firm wide cost cutting brought corporate expenses down to levels that can be supported in the current market environment while leaving room for future growth as things improve.

Year end 2008 assets under management fell to $24.0 billion from $46.2 billion as of YE 2007- a drop of 48%. The decrease consisted of $17.6 billion in market depreciation and net redemptions of $4.5 billion.

The losses on securities sold and the pre-payment penalties on debt redemption caused a net loss of $1.19 /share for 2008 versus net profits of $1.22 /share in 2007.

Prior to last year Calamos had posted excellent and consistent profitability along with revenue growth. Here are its per share numbers from 2004 through 2008 as reported by Value Line:

Year …… Sales ….. Cash Flow ….. EPS ..... Book Value .….. Share Range

2004 …… 13.57 …… 4.67 ………. 1.09 ……. 6.89 ………. $19.40 - $28.35

2005 …… 18.16 …… 1.48 ………. 1.26 ……. 8.09 ………. $20.55 - $32.81

2006 …… 20.95 …… 1.78 ………. 1.45 ……. 9.26 ………. $24.23 - $44.10

2007 …… 22.68 …… 1.76 ………. 1.22 ……10.24 ………. $20.06 - $34.61

2008 …… 19.82 ….. . N/A ………..(1.19) …... 8.66 ……….. .$2.55 - $29.67

Calamos came public in November 2004 paying a $0.07 quarterly dividend. This grew to annual rates of $0.30, $0.38 and $0.44 in 2005 – 2007 before being slashed to $0.055 quarterly in the final period of 2008.

At that rate, the current yield is a very nice 6.18% and this appears to be a sustainable level with projected earnings of $0.37 for 2009 due to the reduced asset base and presently depressed market conditions.

If you remain long term bearish on the markets, then CLMS shares may still hold too much risk for you. If, like me, you feel we may have already seen the worst of the market action, although not the bottom of the economic cycle, you may want to take a position here.

The deleveraging is over. Management feels they hold excellent assets that are poised for a big rebound that can grow assets organically. They have re-opened a convertible securities fund that was previously closed due to lack of good available values. Their overall reputation and pre-2008 performance is very good. Calamos shares now trade at less than half of the already marked down book value versus P/BV ranging as high as three to four times during 2004 through 2007.

Morningstar lists three possible scenarios for the future prospects for CLMS. They feel there’s a 20% chance that AUM and margins recover quickly and reach a ‘fair value’ of $10 under that view. The think there’s a 60% chance that UAM growth is subdued going forward and that the market in general will stay dicey. Under that scenario they see a $7 /share ‘fair value’. Their worst case is that UAM continues to decline and that the management or some outside buyer ultimately ends up buying out current non-insiders at a distressed price of just $1 - $2 /share. Morningstar logically concluded that a $6.50 ‘fair value’ represents their best guess at the long term value adjusted for probabilities.

I can’t really argue with their reasoning. Optimists could see a tripling of the current share price on top of the better than 6% dividend over the next few years. Pessimists could make a case for a loss even from today’s quote.

While I don’t see these shares getting back to their previous $20 - $40 price points I am willing to own them here while keeping an eye on both market conditions and the specific fundamentals of Calamos operations.

Should things work out well I think 100% – 200% total returns are achievable over the coming 2 – 3 years. A short term market bounce might give traders a chance at a quick move up to $5 - $6 for 30% – 50% gains. The stock has a high Beta (of 1.75) making this a good holding for quick market-related movement.

CLMS is not a ‘bet the farm’ type of play but it appeals to me as a good risk/reward for both traders and investors who think we’re due for a better market soon.

Disclosure: Author is long CLMS shares.

Comments

[Paul Price:]

Share Price data was edited out by SA:

Calamos Asset Management, Inc. [NDQ:CLMS]
March 16, 2009 close: $3.56 /share
52-week range: $2.55 (Nov. 21, 2008) - $24.00 (Sep. 19, 2008)
Dividend: $0.055 quarterly = 6.18% current yield

Mar 17 07:41 AM

[U Dontknow ...:]

Clamos closed last week at $5.62 or + 57% since my write-up.
i'm selling some covered calls now.

Apr 04 10:46 PM

[Paul Price:]

JUNE 3, 2009 Calamos Scores With Convertibles
By BOB TITA - WSJ

CHICAGO -- Convertible bonds are back in style with investors, giving John Calamos Sr. the opportunity to showcase an investment strategy he's been honing for three decades.

Last October, Mr. Calamos reopened his firm's Calamos Convertible Fund Class A to new investors for the first time since 2003 after concluding that convertible bonds were sufficiently undervalued for the first time in years. Mr. Calamos's timing was on target. He said that, since Oct. 7, 2008, the convertible fund has had returns of 15.1%, compared with a 9.83% increase in the benchmark Merrill Lynch U.S. All Convertible Index over the same period.

The Calamos fund has returns of about 17% since the start of the year, according to Morningstar.

The fund's total assets have spiked nearly 300% since October to $1.73 billion.

"We're seeing a lot of interest in convertibles right now," said Mr. Calamos, chairman and chief executive officer of Calamos Asset Management Inc. "It's a defensive equity strategy. Convertibles are a way to be in the equity market at less risk."

With convertible bonds, holders receive interest, as with other bonds. But the holders have the option of converting the principal into a specific number of stock shares from the company issuing the bond.

Holders can avoid a price drop in a bond's underlying stock by simply not converting. Regardless of how much the stock falls, holders continue to collect coupons and will recover their investment when the bond matures.

But when the underlying stock price increases above the par value of the bond, holders can capture that upside by selling the bond or converting it to stock shares.

Jun 03 08:03 AM

[Paul Price:]

BofA-Merrill raises Janus Capital, Calamos to buy

Sept 25 (Reuters) - Banc of America-Merrill Lynch upgraded Janus Capital Group Inc (JNS.N) and Calamos Asset Management Inc (CLMS.O) to “buy,” saying an improving dollar might draw more investors to U.S. equity next year, benefiting the asset managers.

Sep 25 10:09 AM