Collectors Universe: Cash Operating Income Continues To Surge

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About: Collectors Universe, Inc. (CLCT)
by: Detroit Bear
Summary

Collectors Universe posted another great quarter, though some stock-based comp made earnings look worse.

Adjusted EPS came in at around $1.30 for the year and free cash flow nearly covered the dividend.

I think shares look poised to provide strong returns due to incremental investment opportunities.

Although headline earnings looked somewhat mediocre, Collectors Universe (CLCT) posted yet another excellent quarter of operating income growth driven by continued strong top-line expansion. Overall, I think FY2017's performance should help alleviate concerns about dividend coverage. Additionally, I believe shares continue to look undervalued given the growth opportunity the company has on its horizon.

A look into financials, dividend coverage, and FY17 grading trends

Q4 was another excellent quarter for Collectors with revenue growing 9.6% y/y to $17.95 million. China was once again a key contributor, helping drive international revenue up 44% y/y, contributing $0.7million of the $1.6 million in quarterly growth. Overall, coin services drove the majority of growth, with revenue up 10% y/y in Q4, though card revenue was also up 14% in Q4. Gross profit was also up about 120 basis points y/y due to the shift in mix to more profitable grading.

Operating income looked weak, with EPS falling nearly 50% y/y to $0.12 per share. Because Collectors Universe does not have robust sell side coverage, there was little work done in adjusting earnings per share to reflect the impact of stock-based comp, which is a non-cash charge. Adjusted EPS was closer to $0.36 per share, an increase of 48% y/y. Cash operating margins were around 27%, in Q4, a meaningful increase from last year's 20%.

For the full year, headline results were excellent, with sales up a solid 15% y/y to $70 million and adjusted EPS up 32% y/y to $1.30 per share. More importantly, free cash flow in FY17 was a robust $9.7 million, providing 82% dividend coverage. Although the dividend may need to be reduced in the 2-3 years if cash coverage does not improve, I continue to believe the dividend looks safe if operating income growth can replicate its FY2017 pace.

Source: CLCT FY17 10-K

Interestingly, the grading mix experienced a weird change in 2017. Autographs processed fell 33% y/y, though coins and trading card units processed 30% and 14%, respectively. I think this could be a long-term trend, as the selfie continues to replace the autograph as a celebrity stamp of choice. However, I believe the market will always have its place, and I am not concerned as long as the other segments perform well.

Valuation looks attractive given EPS opportunities

With EPS up 32% in FY17, shares trade at a trailing multiple of 18.6x earnings. China growth and continued expansion of its California facility that will go live in November of 2018 will create a new revenue stream and more efficient grading systems could drive some earnings expansion. I do not expect another 30%+ surge in EPS, but I think 10% is a reasonable expectation. More importantly, I continue to adore Collectors' microcap moat, and I think returns will continue to be strong for the next 3-5 years. My fair value range remains unchanged at $27-32 per share.

Disclosure: I am/we are long CLCT. 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.