The Bull Case on Collectors Universe (CLCT, EBAY)

Analyst ValMan (a pseudonym) works for a hedge fund that specializes in small cap value technology and Internet stocks. His fund is long Collectors Universe (ticker: CLCT), arguably a cheap proxy for eBay (ticker: EBAY). His reasoning, presented in his own words below, should be of interest also to eBay investors. As always, readers should check figures, claims and data for themselves. Corrections and disagreements welcome in the comments below:

Business:

• Established market share: CLCT is the largest third-party authenticator of coins, sports cards, stamps and autographs, partly due to CLCT's partnership with eBay (ticker: EBAY). It has the leading authentication brands in coins (under the PCGS name) and in sports cards (under the PSA name).
• Value of service provided: Authentication increases the liquidity and value of collectibles, and the service creates value in excess of the fee to authenticate, he claims.
• Demand for authentication rising as the number of faceless transactions rises, particularly on eBay.
• Leveraged to rising gold and silver prices: The largest segment of CLCT's business is in the coin market, which has been strong over the past year and should grow if gold and silver prices continue to rise.

Financials/Valuation (CLCT is currently trading at $15.30 with a market cap of about $133 million):

• Most recent quarter: revenue of $8.96m up 30%, operating income up 62%; earnings were $0.19. (These are Analyst Valman's numbers; readers should check them and others in this write-up.)
• Cash flow: minimal cap-ex requirements, company paid up-front for services, so strong cash flow generator.
• Operating leverage: incremental units are passed through existing capacity, so roughly 60 cents of every dollar of incremental revenue falls to operating income. Operating margins are about 25%, up from the low 20% level last year; should rise to the high 20's range in 2006.
• Balance sheet: $7 per share in cash.
• Valuation: on annualized March quarter results, trades at 8 times EBITDA and 13 times current earnings net of cash.

Catalysts:

• Potential acquisition in the diamond or gemstone space would be accretive to earnings and would significantly expand target market.
• Potential for new analyst coverage.
• Company presenting at Roth Capital and Thomas Weisel conferences in September.

Target Price - $25

Analyst ValMan thinks CLCT can grow revenue by 20% in 2006, generating 90 cents in earnings and $14m in EBITDA, up 30% over 2005. "While there are no direct publicly traded competitors," Analyst ValMan writes, "its strong growth and margin performance warrant a 20 P/E multiple (1x PEG). Adding back the $7 in cash per share, this yields a price target of $25".

I'd be interested to hear other readers' thoughts on Analyst ValMan's thesis. CLCT chart below.

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Comments

[Ezra Marbach]

But CLCT doesn't have the international exposure that EBAY has. So is it really a proxy for EBAY?

[ValMan]

Collectors is not a proxy for Ebay’s overall business, for example US vs. International or categories outside of coins, autographs, stamps and cards. However Collectors, like eBay, is an excellent play on the overall shift to online commerce and trading where there is a greater need for Collectors third party authentication services. To give you a sense currently on eBay there are 7,651 PCGS (Collectors brand name in coins) graded coins, which represents only 11% of the 68,011 coins now on eBay. What is impressive is that last year at this time roughly only 7% of eBay's coins were graded by PCGS. I expect Collectors to continue to further penetrate the eBay market, which is a proxy for Collectors growth in overall internet based transactions.

[DavidJackson]

Collectors Universe stated in its Q2 call that the average fee per unit graded fell sequentially from $12.14 to $11.88. It seems that the reason is a shift in revenue mix: authentication fees for coins average $14.22; sports $7.31; and the autographs and stamps $22.68. ValMan - can you explain why this isn't a negative?

[ValMan]

Great question David. Collector’s ASP’s have actually risen steadily over the past several years. The reason that they dropped in Q1 was due to a program called “first strike

[JimLivingston]

This is great analysis. Thank you, ValMan, whoever you are. It would be great if Internet Stock Blog could provide more such opinions from hedge fund managers. Anonymous would be ok.