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.