Ambassador Group: This Travel Company May be the Way to Go

| About: Ambassadors Group, (EPAX)

While having dinner at a friend's place in February, I mentioned to him how difficult it was to find two good investments to highlight this month, as many of the stocks on my watch list were either expensive or the sectors they belonged to were going through a period of weakness. He suggested that maybe, this month, I should highlight "Stocks That Almost Made the Cut".

I almost considered taking up his suggestion but then decided to run a stock screen to see if something interesting showed up. While I do not recollect the exact criteria I used for this screen, I was looking for small-cap dividend paying stocks that had reasonable valuations and high profit margins. Amongst the results of this stock screen, I noticed a company that had also shown up when I ran a screen more than a year ago that helped me find the movie theater chain Marcus (NYSE:MCS) and the propane supplier Suburban Propane (NYSE:SPH). Both Marcus and Suburban Propane did very well in 2006 and while I picked up Marcus in January 2006 for my personal portfolio and sold it on 9/26/2006, I did not buy Suburban Propane. Unfortunately I did not feature either stock in my investment newsletter but did write about Marcus on my blog.

The stock that showed up in the screen I ran in January 2006 and once again last week is Ambassadors Group (NASDAQ:EPAX), a Pacific Northwest company that arranges international and domestic travel for students, athletes and professionals. Most of the customers of the company, who are also referred to as "delegates", come from the People To People Ambassadors program established by President Dwight D. Eisenhower in 1956. The company was spun-off from its parent company, Ambassadors International (AMIE), in 2002 and the stock has done extremely well over the last five years, gaining more than 400% since March 2002. This 400% increase was driven by a high rate of growth in revenue and earnings as well as management's commitment to return value to shareholders through a combination of dividends and share buybacks. While the days of hyper growth seem to be coming to an end, the company is still attractively valued as discussed below.

Would you consider a company that ...

  • expects double digit growth in both the top line (sales) and the bottom line (income) in 2007
  • has a profit margin of 34.45% (for the full year 2006)
  • recently completed a large share buyback
  • pays a dividend (which was increased 35% in 2006)
  • has a solid balance sheet with more than twice the amount of assets as liabilities
  • and is selling at 16 times 2007 earnings
  • ... a good investment? If you do, then you should take a closer look at Ambassadors Group. The company expects to grow revenue more than 17% and earnings more than 20% in 2007. It recently completed a $33 million share buyback representing 5.77% of the total shares outstanding and still has $5.4 million left over from a $25 million stock repurchase plan (.pdf) launched in 2006. The company sports a modest dividend yield of 1.5% but when combined with the share buybacks the "payout yield" is significant. To learn more about payout yields, check out Mebane Faber's interesting post about a new twist on the Dogs of the Dow theory.

    As you can see from Ambassadors Group's website, the company is also actively hiring. If you happened to read the February 2007 edition of SINLetter, you might recollect that I found last month's pick ICON plc (NASDAQ:ICLR) because of their hiring activity, which is usually a sign of growth. While researching Ambassadors Group, I was a little concerned by the fact that they posted a loss in the fourth quarter of 2006. I then found out that just like theme parks, their business is cyclical and they post losses in the first quarter and fourth quarter of each year and make their profits in the spring and summer.

    This company with a market cap of $617.34 million has $133 million in cash and short-term investments on its balance sheet and negligible debt. It should be noted that $60.7 million of this cash and investments are actually "participant deposits". With a strong balance sheet, excellent growth prospects, reasonable valuation and profit margins that would turn even software companies green with envy, I believe that the prospects of Ambassadors Group are bright in 2007.


    It is hard to identify direct public competitors of this company due to the unique nature of its business but you could consider travel companies like Expedia (NASDAQ:EXPE), Priceline (NASDAQ:PCLN) and the travel arm of American Express (NYSE:AXP) as competitors of Ambassadors Group.

    The Good:

  • Ambassadors Group grew its revenues and income by 17% and 19% respectively in 2006 and expects a similar rate of growth in 2007.
  • The profit margin for 2006 was 34.45%.
  • Since the beginning of 2007, the company has already deployed $35.5 million to purchase 6.3% of the shares outstanding.
  • The company returned 50% of operating cash flow to shareholders in 2006.
  • Ambassadors Group increased its dividend by 35% in November 2006.
  • As of Feb 1, 2007 the company had 60,600 "delegates" (read customers) enrolled when compared to 47,800 in 2006, representing a 26.78% increase year-over year.
  • Cash balance increased by $24 million and total assets grew 23% in 2006.
  • The Bad:

  • Gross margins were negatively impacted in 2006 due to higher airfare on account of rising oil prices. Even though oil prices have backed away from their highs, the company does not expect airfares to drop.
  • Operating expenses grew 21% in 2006 but a large part of that was because of marketing initiatives aimed at increasing sales in 2007.
  • The tax rate for 2007 will increase when compared to 2006 because the company used tax exempt investments in 2006.
  • Capital expenditures are likely to increase in 2007 because of a new building project that the company has undertaken. Total cost of this project is projected to be about $20 million, of which $7.5 million was expended in 2006.
  • The company is currently seeing a 30% withdrawal rate amongst its enrolled delegates. Such a high rate of attrition would be a sign of trouble at companies that provide satellite radio, phone or cable services but according to Ambassadors Group this rate of withdrawal is to be expected since delegates often make plans more than a year in advance.
  • The Numbers:

    P/S 8.06 Cash and Investments $133.1 million
    P/E 23.80 Long Term Debt $0.196 million