Collectors Universe Inc. (NASDAQ: CLCT) is a California based third-part collectibles business that specializes in grading and authenticating rare and highly valuable items such as coins, trading cards, sports memorabilia and celebrity autographs. Additionally, Collectors Universe provides price guidance for hard-to-price assets with current market prices for rare collectibles and other high-value assets, and hosts collectors’ conventions that bring together dealers, enthusiasts, buyers and sellers. With over 50 million collectibles authenticated or graded, Collectors Universe is the top player in the collectibles world and the industry leader in authentication and coin exchange with operations in the United States, Asia and Europe.
Collectors Universe’s shares ended the week of 9/11/2015 at $17.10, in the middle of the company’s 52-week range of $11.66 – $25.82, with a market capitalization of $151.9 million. While shares are down about 18% year-to-date, they are up about 27% from analyst price target estimates of $13.50. The company has a stock beta of 0.6 which means it will likely be significantly less volatile than the broader market which can be a good thing in these times of high market volatility and offers some degree of asset protection and diversification. With shares at $17.10 and earnings of $0.87 per share, Collectors Universe has a price-to-earnings ratio of 19.6x.
Collectors Universe most recently paid a quarterly dividend of $0.35 per share on August 28, 2015, giving the company an annualized dividend of $1.40 and a solid dividend yield of 8.2%. The dividend was flat quarter-over-quarter but up about 8% year-over-year. The company’s quarterly dividend has grown over 337% since the first dividend of $0.08 per share was paid on June 26, 2006. Collectors Universe has paid dividends for over 30 consecutive quarters and rewarded long-term holders with dependable dividend income.
For the three months ended June 30, 2015, Collectors Universe reported net revenues of $15.4 million, down 7% from 2014 as a 251% increase in product sales revenue was not able to offset an 8% decrease in authentication and grading services which is the company’s leading revenue driver. Under the services segment, coin service revenues fell 13% due to a drop in revenue from the Baseball Hall of Fame modern coin program. The services segment had gross profit margins of 59%, down from 64% in the year ago period. For the quarter, Collectors Universe reported net income of $1.8 million, or $0.21 per share, down 26% year-over-year. CEO Robert Deuster is confident the company’s international expansion will promote revenue growth in FY2016 as market conditions in the United States remain stable and the company continues to increase its service fees.
New Revenue Source
Collectors Universe recently launched Collectors.com, a website that lists 9 million collectibles with an aggregate value of $1 billion from over 53,000 sellers. The website aggregates data from multiple sources and lets users search several websites through its portal, a strategy that is popular and successful in the hotel and airline industries. CEO Deuster commented that the website will be cloud-based with help from Amazon’s AWS infrastructure and the company plans to expand the types of collectibles offered to connect more buyers with sellers. Users will be able to search collectibles with filters such as price, seller reputation and condition. The company launched the website in response to a clear industry need for a more simplified, central and speedy search process for collectibles, and for better authenticity verification. Companies such as eBay (EBAY) and Amazon (AMZN) have dominated the industry but overly complicated search engines and falsified authentication have plagued both companies with rampant cases of fraud and fake goods. Collectors.com aims to eliminate both of these issues, which could give Collectors Universe a significant advantage in the industry.
Company: Provides Assurance of Collectible
Enthusiasts, who treasure collectibles, dominate the collectibles industry. Many of these individuals see them as stores of value and capital appreciation. Given this specialized client base, the industry is more immune to economic cycles, sees less volatility in demand and has recovered significantly since the recession of 2008 as disposable income has increased. Industry analysts have a bullish rating for the collectibles sector, which has grown 6% from 2010 to 2015 and is now worth over $1 billion in revenues. Over 20 hedge fund managers include collectibles in their portfolio and have assigned a buy rating to the sector as the US economy shows clear signs of strength.
Competition for Collectors Universe comes mostly from privately held companies that have nowhere near the annual revenue of Collectors Universe by comparison. Coins authenticated and graded by Collectors Universe often receive premium pricing due to the company’s strict grading policy. Oftentimes, collectible companies will not accept items that have not been certified by Collectors Universe, which gives the company a significant advantage over its competition and makes it a de facto standard setter in the industry, and serves as a moat that protects the company. The company also employs 16 sports memorabilia experts that have an average experience of 28 years and 6 autograph experts that have an average experience of 25 years.
Being in such a niche industry with a high barrier to entry, Collectors Universe’s sector dominance and reputation equates to continued success. Many analysts have been skeptical of investing in Collectors Universe due to management’s dividend policy. Despite a low dividend coverage ratio, the company has maintained a consistent payment to shareholders even through the 2008 recession because of a healthy balance sheet and steady cash flow. With significant insider ownership, shareholders’ interests are nicely aligned with management. International expansion, especially in areas like China, is expected to significantly grow revenues because the collectibles sector is less at risk than China’s slowing manufacturing and real estate sectors. The company should also see a boost in reputation, industry dominance and revenues from its online portal. Revenues should also grow with the planned introduction of several new coins by the US Mint in the upcoming quarter. An increase in revenue trickles down to shareholders through the company’s impressive gross margins, which continue to grow because Collectors Universe has a solid comparative advantage over its peers, and can charge more for services provided.
Shares are attractive for dividend investors and have been beaten down year-to-date, but offer compelling upside because future web portal revenues and earnings are likely not reflected in current valuation. Any market-driven dips would offer strong buying opportunity with this dependable dividend stock.
I own the stock. I buy more shares as opportunity knocks. I have used their numismatic grading services for many years.