China Drives Collectors Universe

| About: Collectors Universe, (CLCT)

Summary

Collectors Universe's expansion in China is working even better than anticipated.

The current runrate is already exceeding long-term forecasts.

I am increasing my fair value range to $27-32.

Underfollowed and underrated dividend yield machine Collectors Universe (NASDAQ:CLCT) posted absolutely fantastic Q2 2017 results driven by robust growth in China as well as strong performance in the underlying core business. I believe the company's microcap moat is firmly intact, and I am increasing my fair value range significantly to $27-32 to reflect the initial blowout success in China and the underlying potential for the market to become equal or higher than the United States. Shares are up 30% since my last recommendation, and I would even consider a position after the current run up.

China Significantly Outperforms Expectations

Revenue for the second quarter grew a whopping 41% y/y to $17.9 million, which drove EPS to $0.34 per share-an increase of over 280%. The coin business in particular surged 57% y/y-an increase of $4.7 million. For a mature business like Collectors Universe, a surge this large is typically driven by M&A. However, Collectors demonstrated the impressive runway for geographic expansion, as China revenue growth accounted for $3.2 million (68%) of the increase in card revenue.

Why is this business working so well? The first factor is Collectors' multi-year service agreement with Guojin Gold, which is one of China's largest distributors of precious metals through Chinese banking channels. Management appropriately messaged somewhat modest expectations for the program, communicating revenue of $2.8 million/yr in the near-term growing to $4.6 million/yr by 2020, which is why this beat was such a surprise.

In addition to the agreement with Guojin, I think Collectors learned well from its European expansion efforts and decided to locate its grading services directly in China without sending grading experts across the world and back to grade. From the conference call:

" Our efforts last summer to build a strong processing and grading centre in Shanghai paid off as the release of new Chinese coins to us from Guojin materialized in the quarter and we were able to meet their initial demand. This is very important since our grading turnaround allowed Guojin to efficiently market PCG as graded gold and silver Pandas to customers through their banking customer channels."

Core Business Performing Well

Aside from the robust Chinese expansion, Collectors' core US business is performing well. Management noted that the US coin business bottomed out in the summer and is now strengthening on improved macroeconomic conditions as well as stronger gold and silver prices. Without question, PSA is the leading brand in trading card authentication market with the top 10 most expensive collectibles sold in 2016 in the trading card segment graded by PSA. Likewise, PCGS graded the top 20 selling auction coins in 2016. Collectors Universe is the unparalleled market leader in both collectible grading segments with a wide moat in its small niche.

What is Collectors Universe Worth?

With a significant increase in the China business driving revenue far above my expectations, I am increasing my fair value range for Collectors Universe to $27-32. The primary driver of this increase is pulling forward China revenue growth and increasing the total potential of the opportunity. While there are legitimate concerns about what happens to this market after the baby boomer generation perishes, I think the next 3-5 years will look very solid for equity holders. Additionally, there is no telling how the hobby may evolve once Gen X'ers and millennials have larger nest eggs to spend on hobbies.

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.

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