Calamos Asset Management: Over 6% Yield And 50% Undervalued.

| About: Calamos Asset (CLMS)

Summary

My "October Strategy" is a screen run on the Morningstar database designed to identify stocks that are primed to bounce back within three to six months.

Calamos Asset Management Inc., identified by the screen, is analyzed.

CAM has minimal debt, pays a dividend of over 6%, is undervalued with a large margin of safety and has significant insider ownership and recent insider purchases.

Calamos Asset Management Inc. Class A shares (NASDAQ:CLMS) showed up on my "October Strategy" Screen. As I explained in my previous article, I run this screen every fall after the summer doldrums to ferret out companies, which are solid financially but may be subject to tax-loss selling and mutual fund window dressing. The strategy attempts to identify financially strong stock market candidates, which are primed to bounce back within three to six months.

Calamos Asset Management (CAM) looks intriguing with a market cap of only $198.9 million and cash and cash equivalents of $90 million. What is going on? Mr. John Calamos Sr., founder, chairman and CEO, has been buying stock hand over fist for quite some time. The company pays a dividend of 6.19% and is buying back stock as well. The company is trading very close to its Net Current Asset Value (NCAV) per share for the quarter that ended in June 2015 calculated as:

NCAV =

(Total Current Assets

-

Total Liabilities

-

Preferred Stock)

/

Shares Outstanding

=

(517.295

-

367.287

-

0)

/

20.53

=

7.31

* All numbers are in dollar millions except for per share data and ratio. Source: Gurufocus.com

Calamos Asset Management, Inc. (CAM) is a public company with Class A shares trading on the NASDAQ Global Select Market under the ticker symbol CLMS. CAM's Class B shares are owned by Calamos Family Partners, Inc. (CFP), referred to as "Calamos interest" and have majority voting control of CAM since CAM went public in 2004. As of June 30, 2015, CFP retained 97.4% of voting control. Calamos Investments LLC ("Calamos Investments") is a consolidated company in which CAM holds a 22.2% economic interest and CFP holds a 77.8% economic interest as of June 30, 2015. It is interesting that this wonky corporate structure (surely driven by tax minimization consideration) results in a misreporting of market capitalization because the 77.8% economic interest belonging to the Calamos Family Partners Inc ("Calamos interest") is not reflected in the diluted share count. However, taking the Calamos interest into account, the market capitalization is approximately $697 million.

(1) Represents combined economic interest of Calamos Family Partners, Inc. and John P. Calamos, Sr. who is also a member of Calamos Investments LLC. Also referred to as collectively "Calamos interest".

(2) Represents combined economic interest of all public stockholders, including John P. Calamos, Sr. and John P. Calamos, Jr.'s combined 17.13% ownership interest of Class A common stock. The calculation of ownership interest includes options and restricted stock units that vest within 60 days, as well as CFP's indirect ownership interest in Class A common stock purchased by Calamos Investments LLC, pursuant to the Company's share repurchase plan.

Calamos Investments LLC ("Calamos Investments") is owned (NYSE:A) 22.2% by CAM, and (NYSE:B) 77.8% by Calamos Family Partners, Inc. and John P. Calamos, Sr. ("Calamos interest"). As of December 31, 2014, CAM holds two groups of assets: (1) CAM's 22.2% ownership interest in Calamos Investments and (2) primarily cash and cash equivalents, investment securities, income tax receivables, net deferred tax assets, and a loan receivable from Calamos Investments. CAM presents the entire operations of Calamos Investments with its own in the consolidated financial statements. Calamos interest of 77.8% ownership in Calamos Investments is presented as a non-controlling interest in the consolidated financial statements. In addition, John Calamos personally owns 5.53% of CAM shares and has been consistently buying shares over the past 2 years.

As of December 31,

2014

2013

2012

2011

2010

Earnings (loss) per share:

Basic

0.74

0.94

0.89

0.79

1.00

Diluted (1)

0.71

0.92

0.88

0.77

0.99

Weighted average shares outstanding

Basic

18,275,246

19,903,507

20,334,299

20,103,758

19,884,847

Diluted (1)

18,989,281

20,351,603

20,745,922

20,611,909

20,187,992

Cash dividends declared per share

0.55

0.50

0.41

0.38

0.30

Balance Sheet Data (in thousands):

Cash and cash equivalents

35,285

39,078

106,796

102,166

82,870

Investment securities

339,959

472,241

349,404

318,496

314,215

Partnership investments(2)

143,723

46,425

67,313

33,183

48,915

Total assets(2)

607,156

658,244

639,086

581,985

596,483

Liabilities of partnership investments(2)

10,117

12,378

6,485

127

7,237

Long-term debt, including current portion

45,955

92,115

92,115

92,115

125,000

Total liabilities(2)

109,070

159,762

157,237

154,191

193,091

Redeemable non-controlling interest in partnership investments

76,167

7,551

20,412

12,034

1,697

Calamos Asset Management, Inc. stockholders' equity

204,937

208,056

197,643

186,592

183,016

Non-controlling interest in Calamos Investments LLC (Calamos interest)

216,982

282,875

263,794

229,168

218,679

Total equity

421,919

490,931

461,437

415,760

401,695

Assets Under Management(3) (in $ millions):

Funds

21,001

22,394

23,329

25,045

27,352

Separate accounts

2,505

4,149

6,326

7,732

8,062

Total assets under management(3)

23,506

26,543

29,655

32,777

35,414

Notes:
(1) Diluted shares outstanding are calculated assuming the Calamos interest exchanged all of their membership units in Calamos Investments LLC for shares of Calamos Asset Management, Inc.'s Class A common stock on a one-for-one basis and including the effect of outstanding restricted stock unit and options awards. In 2009, the ownership structure was de-unitized and the exchange, described above, is now based on a fair value approach which results in the same or fewer shares of Class A common stock being issued at the time of exchange. The effects of the exchange are anti-dilutive and are therefore excluded from the calculation of diluted weighted average shares outstanding for 2010 through 2014.
(2) For the year ended December 31, 2014, we changed the presentation of assets and liabilities of partnership investments from a net basis to a gross basis in the consolidated statements of financial condition. Amounts previously reported have been reclassified to conform to the current period's presentation.
(3) Assets under management exclude assets under advisement

Valuation

CAM is trading at close to tangible book value. There are 18.7 million shares outstanding with a notional 77.8% of the economic interest attributable to "Calamos interest". I have used a two-pronged approach to valuation which I think is conservative.
(1) I calculate the "present value" of the "dividend cash flow."
(2) Then I calculate the "non-calamos" shareholder share of the corporate investments.
(3) Then I will add (1) and (2) to get a approximate intrinsic value per share.

(1) CAM is paying $0.60 per share as dividend. Its five-year dividend growth rate is close to 20%, this is obviously not sustainable. In my valuation exercise, I assumed dividends will grow by 2% per year for the next 10 years and 0% thereafter. I assumed a discount rate of 2.5% (10-year bond). Based on the stream of dividends alone, the valuation of the shares is $10.84.
(Calculations with Gurufocus.com DCF calculator.)

(2) CAM has a net of $377 million of corporate investments on the balance sheet. 77.8% is attributable to the "Calamos interest" and 22.2 % to CAM shareholders. There are 18.7 million CAM shares outstanding. Therefore CAM share holders are entitled to approximately $5.75 per share of these corporate investments.

{(377000000/18700000) * (22.2/77.8) = 5.75}

(3) Adding $10.84 derived from (1) and $5.75 (2) gives me a valuation of $16.59, which I believe is reasonably conservative. Note that I have ignored all other assets apart from the corporate investments. This represents a more than a 50% margin of safety, which appears to be adequate.

Conclusion

CAM is trading close of NCAV and paying over 6% dividend. There is strong insider buying. The company has minimal debt. The company is at least valued at over $16.50 per share on conservative assumptions. On the other hand, the compan's assets under management (AUM) have been falling. In a bear market, asset managers suffer disproportionately.

On balance, I think this is a strong candidate for a bounce back to the low teens by early 2016, provided the market recovers and there is no bear market, which I expect.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CLMS over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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