Is Collectors' Universe a Fake? (CLCT)

Includes: CLCT, EBAY
by: David Jackson

In an article in this weekend's Barron's (paid sub. req'd), Neil Martin predicts that Collectors' Universe stock (NASDAQ:CLCT) could fall 25%.

Collectors' Universe is an interesting stock. In an earlier article on the Internet Stock Blog, an anonymous hedge fund analyst (whose fund was long the stock at the time of writing) argued that CLCT is a cheap proxy for eBay.

The Barron's article highlights legal liability and credibility issues in CLCT's collectibles authentication unit which accounts for under 5% of revenue, and weak demand in its coin business which accounts for 61% of revenues. At the same time, CLCT has a market cap of $130 million with $55 million in cash and no debt.

Key points from the Barron's article:

  • PSA/DNA, Collectors' Universe's collectibles authentication unit, is fighting two lawsuits challenging the integrity of authentications it made.
  • In one case, a collector alleges that PSA/DNA "authenticated" autographs on photos without ever seeing them.
  • In another case, CLCT has been sued by William Miller, a former employee, for issuing more than 14,000 certificates of authenticity bearing his name that were used without his permission to verify the legitimacy of various sports memorabilia. "The company essentially blames an administrative glitch." The employee won the case in Superior Court of California, and the judge referred the damages claim to appeals court.
  • Two trade magazines have simultaneously published scathing criticisms of CLCT's service. Pen and Quill, a magazine of the Universal Autograph Collectors' Club, alleges that CLCT "authenticated" fakes in at least 12 cases, concluding that "It's not uncommon to see a PSA/DNA [expert] 'authenticating' an autograph that is certainly not authentic". Manuscript Society News covered the Miller law suit.
  • Miller is claiming more than $10 million in damages. That's more than CLCT earned for the entire fiscal year ending June 2005 ($4.8 million). Note, however, that CLCT has $55 million in cash and no debt.
  • Although PSA/DNA accounts for less than 5% of CLCT's revenues, "its verification services have been a model for the rest of the company, so the controversies involving the unit could have broad implications for the company's image."
  • CLCT, with a market cap of $130 million, has already fallen from about $20 per share to $15 per share due to disappointing coin sales.
  • CLCT's coin business accounts for 61% of revenues and has been hit by a sharp drop in orders from a customer who accounted for 11% of coin revenues. As a result, Roth Capital cut its fiscal 2006 earnings estimate to $0.35 from $0.51.

CLCT 12 month chart below.
CLCT chart