Collectors Universe Is Not a Mark McGwire Home Run, But Is a Good Value Play

Apr.11.11 | About: Collectors Universe, (CLCT)
Collectors Universe, Inc. (ticker: CLCT) provides authentication and grading services to dealers and collectors of high-value coins, trading cards, event tickets, autographs, memorabilia and stamps (collectibles). Some of the Company’s brands include Professional Coin Grading Service [PCGS], which is the brand name for its independent coin authentication and grading service; Professional Sports Authenticator [PSA], which is the brand name for its independent sports and trading cards authentication and grading service; and PSA/DNA Authentication Services [PSA/DNA], which is the brand name for its independent authentication and grading service for vintage autographs and memorabilia.
CLCT appears to be the market leader in the brands above (did Mark McGwire home run, expensive old coins, Honus Wagner card). It estimates only 10% of vintage coins and 15% of vintage cards have been stamped. CLCT generates a lot of cash with no debt. In the past, it has not used that cash wisely. Four to five years ago, CLCT went public at $22/share and squandered much of the funds it received. Its worst acquisition was a jewelry grading business. It paid $12M, i sold it in FY 08 or 09 for under $1M, and still has $3.5M to pay on a lease. It made another bad acquisition (currency grading).
As a result of these poor acquisitions, CLCT fired its old CEO and put a new CEO in place April 09 who seemed to turn around the ship well. The new CEO came from Shamrock; he used to be in Private Equity. Shamrock held 9% of CLCT’s shares -- CEO McConnel was on the board. When the new CEO came in, the stock was down in the $3-4 range.
Also related to these past mistakes, CLCT became very conservative with its cash. It now returns all excess cash in the form of share buyback and dividends. The share buybacks in July 2009 were about 20% of the Company' and at $5/share, so that was the first good use of CLCT’s excess cash. The dividends consume CLCT’s entire cash flow from operations. They are trying to grow into their dividend, which is not preferable in my view. The other negative could be that the dividends may decrease if CLCT cannot continue to grow or if it wants to begin using more of its cash for acquisitions/expansion. The market may react negatively to a dividend decrease.
As an aside, CLCT’s current earnings are skewed by the release of an $8M income tax valuation. Due to the losses mentioned above, it had NOLs stored up it thought it would not be able to use. After a profitable FY 2010, it released the valuations. Taking away that one-time income pick-up, their current EPS is actually 1.10 and their current P/E is 12.9. Forward P/E is probably 11-12. CLCT should not pay any tax again in FY ’11, but then will probably resume in 2012, which again will limit their dividend.
On a few positive notes, CLCT purchased an Expo business, and it is not impaired at an 18% discount, which is a high discount rate. It achieved its FY 2010 goals and awarded stock comp to execs. At 12/31/10, it believes it will make the FY ’11 goal and began recognizing the stock comp expense, which is a good sign. Also, it just expanded into France. If commodity prices stay where they are or continue to rise, CLCT should benefit. One negative is that insiders, including the single largest shareholder, are selling at $14/share (5.5% sales in past 6 months. This could be for asset diversification but still is a bad sign.
In summary, I am bullish on CLCT. When I saw the potentially unsustainable dividend, my first impression was negative, but I believe the P/E of 13 is low versus the general market and CLCT should grow 7-10% this year. I discounted CLCT at 11%, assumed EPS of 1.10 with 7% growth annually over the next 5 years and 1% thereafter. It valued CLCT at $14.18. It looks like the stock is priced in the right ballpark with a 9% dividend. It seems like a fairly safe 9-10% return. It’s not a Mark McGwire home run, but I do think it’s a good value play in the midst of a flat economy. I think they will have a big current quarter and the stock will jump 5-10%. I would potentially sell at that time.

Disclosure: I am long CLCT.