Collectors Universe: A Scandal Waiting To Be Exposed
Summary
- Collectors Universe collects revenue from authenticating and grading cards, coins, and autographs.
- It has recently been exposed on trading card forums that a lot of trimmed cards have been authenticated and graded by PSA (Collectors Universe's trading card division).
- This is a major problem that could result in the company being liable for large losses and threaten the business model of CLCT's trading card division.
Collectors Universe (NASDAQ:CLCT) is a micro-cap stock that has been on quite a run this year. The company has reported year over year growth in revenue and earnings in the last two quarters and the stock price has almost doubled. However, the company may have a major problem that could result in the company being liable for large losses and threaten the business model of its trading card division. This segment happens to be the only part of CLCT's company that is growing. Before I discuss that issue, I will give an overview of CLCT's business.
Company Overview
Collectors Universe has two main segments: coins and trading cards/autographs. The company collects a fee to authenticate and provide grades for coins, trading cards, and autographs. The company gets revenue from other sources as well such as subscription fees for its coin and trading card collectors clubs, subscription fees for its certified coin exchange, trade show revenue, advertising revenue, and commission revenue. However, the company derives most of its money from authenticating and grading coins, trading cards, and autographs.
The coin grading division has been stagnant for several years. With the exception of 2017, coin revenue has been flat at around 42 million since 2014. Refer to the table below.
Revenue (millions) | 2014 | 2015 | 2016 | 2017 | 2018 |
Coins | 42.00 | 42.06 | 40.21 | 47.54 | 42.84 |
Trading Cards and Autographs | 14.09 | 14.93 | 15.91 | 17.93 | 21.07 |
Other | 4.48 | 4.70 | 4.84 | 4.69 | 4.55 |
Total | 60.57 | 61.69 | 60.96 | 70.16 | 68.46 |
So far this year (9 months), the company has reported 30.5 million in revenue for coin grading, so the company will once again have a flat to down year in this segment (assuming they report another 10 million or so in Q4 2019).
The company's trading cards and autographs division has been marginally increasing each year and is on track for another increase this year. Trading card and autograph revenue has been 18.9 million so far in 2019. If the company reports a similar quarter in Q4 to the previous 3 quarters, revenue will be up 15-20% in this division year over year.
Trading Card Authentication and Grading
The card grading division for Collectors Universe is named PSA (Professional Sports Authenticator). The grading process involves sending a card to PSA who then reviews the card for authenticity. If the card is deemed authentic, PSA checks for evidence of doctoring such as re-coloring or trimming. If the card passes those two steps, PSA will grade the condition of the card on a scale of 1-10 and encapsulate the card.
The grade that a card receives can have a huge impact on the value of the card (due to the perceived rarity). For instance, PSA shows the price of a 1952 Topps Mickey Mantle can vary from $40,000 with a grade of 5 (excellent) up to $2,500,000 for a grade of 9 (MINT).
Even modern day cards can fetch enormous sums. In February of this year, a Tom Brady rookie from 2000, which was graded by PSA's main competitor Beckett Grading Services (BGS), sold for over $400,000.
Scandal
Due to the colossal prices people are willing to pay for cards with the highest grades, a lot of shady individuals have been trimming cards and then submitting them to grading companies to get them authenticated. It seems authentication companies such as PSA do not have the ability to catch the best trimmers and it's coming to light on sport card forums that there have been a lot of trimmed cards that have been authenticated by PSA.
Posters on Blowout Cards have exposed numerous examples of trimmed cards and one post, in particular, describes how a suspected card trimmer put out a job listing for a person to modify a paper cutter that would allow for trimming down to 1/64 of an inch. It can be assumed that the card trimmer probably researched the size needed and that this small fraction falls within the size tolerance of what card companies allow when making their cards. If this is indeed the case, then grading companies may not be able to differentiate the best trimmed cards from untrimmed cards and they may not be able to truly authenticate a card. Based on the number of trimmed cards that are getting exposed, this seems to be the case, and authentication companies are charging a fee for something they cannot truly provide.
The main reason that so many card trimmers are now being exposed is due to the creation of the website worthpoint.com. This website has previous sales information of cards along with pictures, so amateur detectives can easily compare pictures of the same card before and after it was trimmed and authenticated/graded. This has exposed many big eBay sellers who have probably been doing this for years. Due to the ease and huge profit potential of trimming cards, I suspect card trimming has been rampant.
Liability and Threat to Business Model
PSA offers a financial guarantee of grade and authenticity for their grading service. The guarantee says:
If PSA, in fact, concludes that the card in question no longer merits the PSA grade assigned or fails PSA's authenticity standards, PSA will either:
- Buy the card from the submitter at the current market value if the card can no longer receive a numerical grade under PSA's standards or,
- Refund the difference in value between the original PSA grade and the current PSA grade if the grade is lowered. In this case, the card will also be returned to the customer along with the refund for the difference in value.
Therefore, all the trimmed cards that have been authenticated and graded by PSA seem to be a liability. There could easily be tens of millions worth of trimmed cards that have been graded by PSA. This has only recently been exposed on card forums in the past several months, but as more and more card collectors become aware of this issue, there are surely going to be collectors who find out they have trimmed cards that are worth very little. I am not a lawyer but it seems PSA's guarantee may require PSA to buy those cards back at the price the collector paid if the collectors choose this option.
Also, as more and more collectors become aware of the trimming scandal, this could affect the desirability of graded cards in general. Card collectors may lose confidence in PSA and they may greatly reduce the number of cards they are submitting for grading. Since this is the only business segment of Collectors Universe that is growing, this would obviously not bode well.
Conclusion
I think the trimming issue is only going to be exposed more and more and this will not be good for the stock price of Collectors Universe. This trimming problem could result in massive liability for the company and could also hurt the card grading division of the company.
The stock price is up substantially since the beginning of the year and currently trades at a lofty valuation (2.5 sales) for a company that will have essentially no overall revenue growth for the last 3 years. I don't think most investors are aware of the trimming issue and the stock price could potentially fall quite a bit as more investor become aware of it. I am currently short via puts.
Please do your own due diligence.
Analyst’s Disclosure: I am/we are short 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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