In my previous article on Collectors Universe (NASDAQ:CLCT) I introduced the esoteric and small company for the majority of its business: third party rare coin grading. Here is a link to the introduction of coin grading as a business and why it is important for numismatics. Based on the stunted growth of the coin collecting community, it's hard to believe that the company will maintain the high number of submissions necessary to maintain the powerful dividend that investors are clamoring for.
Still, there are a number of trends that may offset the sluggish growth of the coin collecting hobby, such as the unprecedented growth in commemorative coins released from mints all over the world. The meteoric rise in the price of gold over the last 15 years has maintained collector interest. In addition, the popularity of antiques and collectibles as alternative investments, which has been highlighted on reality television and become mainstream in many ways.
What was not discussed in the previous article was the competition that PCGS faces, namely from the privately owned coin grading and encapsulation service NGC, a division of Certified Collectibles Group. The majority of collectors see both companies as the only option in grading rare coins. Still it would be more worthwhile to try to find some measurable data to discover which company is encapsulating more coins and which stands the best chance for overtaking the other in the future. If PCGS is to maintain its dividend that is one goal it should accomplish.
Population Reports and Which is the Better Coin Grading Company
When arguments over which favorite grading service is better arise between numismatists, the population reports that the grading services issue annually are the most often referenced. Population reports are published data from the company itself of how many of a given coin has been graded, including the date, mint mark, variety and most importantly the numeric grade. Often, population reports are used to discover particular dates and mint marks that have either higher or lower submissions at a given grade and exploit them in the secondary market before others have noticed the trend.
The major problem with using population reports is that there is really no way of knowing how factual or accurate they really are. PCGS is a publicly traded company, but there is no evidence of shareholders questioning the population figures. NGC has no reason to have a third party verify its numbers. It is a privately held company in Sarasota, Florida. In either case no authority or governing body has demanded evidence in a population report.
Using the facts as provided by both companies, PCGS has encapsulated just over 21 million coins in all grades. Just looking at the category of American coins, NGC has encapsulated just under 24 million coins in all grades. Noteworthy is an additional 1.3 million Chinese coins graded in the next highest category. Please note these numbers reflect publishing earlier this year.
We have seen the argument made in the comments section of the previous article that regardless of the number of coins graded by either company, PCGS dominates on the high-end rare coin market, particularly the record-breaking auction results. Although this cannot be proven either way without extensive research and data collection from auction catalogs, there is a gut feeling amongst collectors that PCGS graded coins do sell for a premium against all others.
According to dealers in a survey conducted with the Professional Numismatists Guild, NGC and PCGS scored 'superior' in six out of ten categories. Rick Montgomery of PCGS had this to say about the results: "the fact that PCGS coins consistently sell for more at auctions and on the dealer trading networks than coins graded by other services, suggests the dealer and collecting community have long regarded PCGS as the service of choice." Shortly after making that comment, Montgomery would move to vice president at NGC.
Bulk Submissions of Modern and Bullion Coins and the Rise of the Slab Sticker
There are a finite number of high-end coins. Although they do get "cracked" and resubmitted, the number cannot offset the immense number of submissions in American Silver Eagles and similar bullion and commemorative coins from around the world, which are minted in the millions or tens of millions for each year's issue.
In either case, sheer number of submissions matters the most, not the quality of the coins submitted. This leads us to look at where submissions come from. In most cases it is not individuals making submissions, but parties acting on behalf of individuals such as large dealers or organizations. A growing number of submissions is now coming from organizations and dealer networks, instead focusing on the sale of a commemorative slab with the coin as largely an afterthought.
This has led to a trend of collectors collecting the sticker or insert in the slab over the coin itself. Believe it or not, demand is fueled by pretty designs on the slab, limited edition art, and now signatures of particularly important people involved in the production like mint officials and designers of the coin. NGC has been far more adaptive of this movement than PCGS, maximizing it in world coin and ancient coins submissions. It is absolutely trendy and is scoffed at by the majority of old-school numismatists. Nevertheless, it creates sales for coin grading. As of now, NGC has that facet of the market.
The ANA Effect - Does it Really Matter?
The official grading service of the American Numismatic Association is NGC and has been for a number of years now. Prior to that it was ANACS, a once popular company that has fallen to the wayside of rare coin grading relevancy; a distant third place by many metrics.
Can one make the argument that having the largest numismatic organization in the world backing a particular grading service has positively impacted submissions? It has certainly made the task easier. With either organization, submitting coins is difficult and frustrating at best for the average collector.
The problem is that the fledgling coin hobby's leading organization only has 24,000 members. They are a mix of casual and professional. Compared to bulk submissions of modern and bullion coins by dealers and their networks who might submit several thousand coins to PCGS at a time, the number feels insignificant. Even if each of the 24,000 members was submitting a coin each a year it might not be making that much of an impact.
Window of Opportunity - Baby Boomers
What impact does all of this have on Collectors Universe's awesome dividend? As a reminder, NGC is a privately traded company, but its growth suggests that it is keeping pace with PCGS for sheer number of coins graded and exposure to the future of the numismatic community. One might imagine that PCGS would need to eat up some of that market share to maintain a long-term outlook on the dividend rate. The alternative is to continue to invest in other services for clients that far outweigh anything being offered by NGC.
The other serious consideration for investors is how long the rare coin hobby has until it loses its demand and thereby the necessity of third party grading. It has been said how numismatics has survived world wars, plague, recessions and depressions but our world is changing fast. Not only are we moving towards a cashless society quicker each day, but the generations being born today up to the millennials are not collecting like previous generations did. They will also be a much larger percentage of the population soon. Minimalist lifestyles, increasing costs of living, and ever increasing debt levels are challenging the desire of the ANA and others to maintain this hobby.
Still, for the investor with a timeline in mind who is wondering how long they can hold the dividend there is likely a window of opportunity so long as Collectors Universe can maintain a healthy and dynamic company. By 2030 all baby boomers will have exceeded 65 years of age and make up more than 20% of the population. From my experience as a personal property appraiser, I can attest that when these persons pass away they will very often leave estates in need of services like PCGS. The younger relatives of the deceased will want to cash in on their family's collection and look for verification of authenticity and grade which PCGS and NGC will be able to provide.
As a numismatist I would love the coin grading industry to continue after the baby boomers have retired and passed on. Realistically though, this small and esoteric market (PCGS is the only publicly traded company doing this) will likely fold and yield to one or two companies providing this service to a much smaller clientele. In the last article I took a hopeful look and received some feedback that I should have been more realistic. This is the more realistic thesis.
In the next segment I want to take a look at some of the other assets at Collectors Universe, such as its website presence and take a look at the long-term prospect for those. Lately, the company has invested heavily on its digital presence in web properties and resources for its collectors and clients. This will likely have a powerful long-term impact and is a distinct advantage over NGC and others who have neglected their digital footprint. We will look at whether that can translate into sales in the near term and growth long-term.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.