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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.

CLCT chart

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Source: The Bull Case on Collectors Universe (CLCT, EBAY)