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Collectors Universe: A Low Risk, High Uncertainty Investment

|Includes: Collectors Universe, Inc. (CLCT)

Recently I came across a write-up of Collectors universe (NASDAQ: CLCT) on Investing, an excellent value investing blog I follow. Collectors Universe is a wide-moat business that pays an 8% dividend yield because Mr. Market is expecting the dividend to be cut sooner or later. I disagree strongly with Mr. Market's view and below I'll try to explain why.

I won't talk a lot about the business and the company's financials as they were thoroughly discussed on the Investment Sidekick. However here are some basics.

Business Overview

Collector's business is a simple and straightforward one. They provide authenticity certification for collectible items like coins, cards, autographs and others. The company gets 65% of its revenues and 73% of its operating income from its coin authentication segment, which is not only its main business, but also the one with the most growth potential.

It is the second biggest coin grading company and has graded cumulatively 27 million coins over its history. Its main competitor is NGC (Numismatic Guaranty Corporation) which has cumulatively graded 28 million coins. Both of these companies are the most trusted coin graders by a wide margin. However, Collectors is constantly closing the gap with NGC and sooner or later will be the one with the greater number of authenticated coins in the market.

In case you're wondering, I'm using the "cumulative" number of coins graded to compare these companies for a reason. This number represents not only the market share of these companies but also the strength of their moats. You see the coin grading business is a business build in reputation. The more graded coins one has in the market the more trusted his name becomes attracting more customers.

Furthermore the collectibles that are graded by such a trusted grader (like Collectors) get premium pricing in the market over non-graded ones or ones graded by less trusted companies. This is because fraud is rampant in the market for coins and other collectibles. Verification of authenticity is extremely important for collectors, especially nowadays where a large part of the collectibles market has migrated online.

Finally, despite the great economics of the grading business, it is virtually impossible for any new or existing grading business to compete with either Collectors Universe or NGC. This is because their brands are so widespread and so entrenched in their markets that a competitor would have to struggle for decades before experiencing any significant market share gain.


The economics of the grading business are really wonderful. Collectors Universe operates with a 63% gross profit margin and a net income margin of 11.5%. Furthermore since Collectors' customers usually pay in advance for the grading of their collectibles the company has negative working capital, which means that it's operations are mostly funded by the cost-free float customers are providing.

It doesn't come as a surprise then, that the company generates returns on assets (excluding surplus cash) north of 30%. It has also increased its FCF at an average 20% over the past three years.

Furthermore according to the company only 10% of the US collectable coins market has been graded leaving enormous potential for the future. Moreover CLCT has just opened offices in mainland China which is the oldest and bigger coin market on the planet.

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Disclosure: I am long CLCT.