Ambassadors Group: A Good Addition to a Well Diversified Portfolio

Oct.26.09 | About: Ambassadors Group, (EPAX)

Ambassadors Group (NASDAQ:EPAX) is an educational company that organizes and promotes international and domestic travel programs for students, athletes and professionals. Its travel business includes the ‘People to People Student Ambassador Programs’ for grade school, middle school and high school students to visit domestic and foreign destinations. Their ‘People to People Sports Ambassador Programs’ provide opportunities for middle school and high school athletes. Their ‘People to People Leadership Summit’ and ‘World Leadership Forum’ are Leadership Programs which provide domestic travel experiences for grade school, middle school and high school students. Ambassador’s ‘People to People Citizen Ambassador Programs’ provide foreign travel experiences for business professionals.

NDAQ: EPAX - October 25, 2009 $13.08

52-week range: $6.20 (Mar. 9, 2009) - $17.29 (Aug. 24, 2009)

Dividend = $0.06 quarterly = 1.83% current yield

Ambassador posted four straight years of record sales and earnings from 2004 – 2007. 2008 saw a 37.4% drop as economic conditions caused a drop in demand from cautious consumers. The company just reported fully diluted nine-month 2009 results of $1.37 versus $1.27 for the same period in 2008. This is a seasonal business with all profits generated in the second and third quarters.

Here are Ambassador’s (split-adjusted) per share numbers as reported by Value Line:

Year
Sales
C/F
EPS
B/V
Avg. P/E
Range
2003
1.88
0.55
0.50
2.04
15.8x
5.82-12.08
2004
2.56
0.82
0.75
2.44
17.6x
9.70-18.37
2005
3.22
1.14
1.05
3.22
19.1x
15.83-27.41
2006
4.32
1.37
1.25
4.08
21.7x
22.10-31.28
2007
5.92
1.74
1.55
3.74
20.0x
16.80-41.08
2008
5.20
1.17
0.97
3.57
16.0x
7.42-20.80
Click to enlarge

Consensus estimates now look for $1.00 /share for the full year 2009 and assumes about $0.98 for 2010 due to the depressed economic conditions. That puts the P/E right between 13.1x – 13.4x earnings if things play out as expected. That’s lower than any of the multiples actually seen during the six-year period shown in the table above.

Management has adjusted spending and dividends to reflect the realities of the slow economy. The dividend was cut from 11.5 cents to six cents in this year’s first quarter making today’s yield a still reasonable 1.83%.

Ambassadors Group is totally debt free. As of September 30th they held $55,482,000 in cash and cash equivalents net of participants’ deposits and accounts payable and other accrued liabilities. That works out to about $2.86 in cash per fully diluted share. That was up from $37,650,000 ($1.91 /share) at the same point in 2008.

There doesn’t appear to be a near-term catalyst to make these shares jump. That said, EPAX traded as high as $17.29 as recently as August 24th and they peaked at prices between $18.37 - $41.08 in each calendar year 2004 through 2008. With no debt, solid earnings and a yield better than current bank money market rates I think it’s a good holding in anticipation of the general economic rebound.

Whenever that happens the upside is quite large. EPS can ramp up again and the multiple can expand back to a more normalized 16x – 19x. EPAX shares traded for more than double last week’s closing price during 2005-2006 and 2007 before the recession took hold.

This small-cap company looks like a good addition to a well diversified portfolio.

Disclosure: Author is long EPAX shares.