Growing Domestic and China Opportunity, Brand Leadership, Double-Digit Earnings Growth, 6.1% Yield, Debt-Free Balance Sheet and Recent Stock Price Dip Make Shares Compelling for Capital Appreciation and Income Seeking Investors
Collectors Universe, Inc. (NASDAQ: CLCT) has a stated mission is to be “the gold standard for certification and quality assessment of vintage, rare and modern coins, trading cards, memorabilia and autographs worldwide.” Over the past 15 years, Collectors Universe (CU) has delivered a 10.6% total annualized ROR compared to 3.8% for the S&P 500. This small-cap company offers a 6.1% dividend yield (as of 9/26/2014) with substantial dividend growth upside from compelling growth opportunities in the U.S., Europe, Hong Kong and China.
The company has a focused growth strategy that is based on leveraging its market reputation to offer new services and enter new markets, primarily in the Hong Kong / China region. The company also plans to grow profit margins through technology-based processes and efficiencies.
Over the past few decades, collectibles have gone from being just a hobby to being a valuable specialty investment class of their own, with related demand for verification, condition assessment, valuation and certification services which CU provides – primarily for numismatics (coins), trading cards, autographs, event tickets and memorabilia such as Super Bowl rings. In addition to its services, CU also runs a popular and trusted online marketplace for collectors, dealers and hobbyists.
Steady Long-Term Organic Revenue Growth (7% CAGR), International Expansion, Zero Debt and Dividend Growth Make Shares Compelling
CU has steadily grown domestic and international revenues over the years. Since the founding of its overseas offices, revenues have grown at about 7% annually (see illustrative graph below). PCGS coin grading contributes about 2/3rds of CU’s revenues followed by PSA/DNA at 25% and CCE at about 8%.
CU has zero long-term debt and minimal capital expenses (less than $1 million per year) with strong free cash flow ($9 million per year on average over the past five years). Management fundamentally operates the company as an organic growth business, is not overly focused on acquisitions and believes in using its growing cash flow stream to pay out steady and stable dividends.
Simply put, the company is a niche leader with an experienced management team that thoroughly understands the collectibles market place and has been running a public company since 1999. CU has an attractive business model with high gross margins, minimal annual capital outlay and high barriers to entry. Its conservative balance sheet, with zero debt, is structured to support its dividend growth strategy.
Valuation Offers Significant Upside on Europe, China Growth and Online Exchange
Along with a broad market drop, CU shares dipped to $21.40 with a trailing price-to-earnings ratio of 23.0x and a market capitalization of $189.7 million on 8.9 million shares outstanding.
While shares may appear pricey relative to Book Value, the company’s market dominance, premium brand positioning and leadership, increasing traction with its Europe/China/Hong Kong growth strategy, online CCE coin exchange and Collector’s Corner social media presence are not fully factored into its valuation.
Strong Track Record of Paying and Raising Dividends with Owner/Management Alignment; 6.1% Dividend Yield
CU current pays $0.325 in quarterly dividends per share ($1.30 annualized) and doubled dividends in 2013 to $1.30 from $0.65 in 2012. The company’s strong dividend orientation reflects heavy insider ownership and owner/management’s desire to receive regular dividends from quarterly cash flow and balance sheet strength. This is yet another opportunity for dividend-oriented shareholders to ride along with dividend-oriented owner management for a steady and growing stream of dividends. With shares at 20.61, CU offers an attractive dividend yield of 6.1% with the promise of steady dividend growth and income upside.
Diversified Business Segments to Capture Value across All Collectible Categories
CU’s Professional Coin Grading Service (PCGS) was started in 1986 by David Hall who is a widely respected expert on collectibles and has grown PCGS’ stature exponentially over the years. Since its founding, PCGS has graded and certified over 50 million items (wherefrom it has generated most its revenues), and in 2013, CU graded more than 3.3 million collectibles.
CU was featured in Forbes list of Best Small Companies in 2013. The company has 280 employees spread across its headquarters in Santa Ana, California, and offices in Paris (estd. 2010), Hong Kong (2012) and Shanghai (2013).
What makes CU attractive is that its business is simple to understand and its value proposition resonates well with its customers. Its basic value proposition hinges on
significantly increasing the value of collectibles through authenticity certification, consistent grading on a well-recognized scale, physical tamperproof repackaging to protect collectibles with clear visibility of assessment and grade certification, and the company’s guarantee.
CU is renowned for its third-party independence and trusted by dealers and collectors who feel secure leaving their assets with CU for grading. In addition, CU has a vast database on collectibles availability, recent sales prices and valuation, so a CU certified collectible has greater liquidity and is easier to buy or sell compared to an uncertified, unprotected, unauthenticated collectible of uncertain value. In all its markets, CU boosts seller and buyer confidence, sets a value-based fair market price, and enhances liquidity in the collectibles marketplace.
The company has three business segments – PCGS (Professional Coin Grading Service), PSA (Professional Sports Authenticator) and PSA/DNA Authentication Services, and Certified Coin Exchange (CCE).
PCGS – Category Leader with Stellar U.S. Reputation That’s Growing Worldwide
PCGS drives the bulk of CU’s revenue from its coin grading services. PCGS also runs the world’s largest online database of graded coins with direct links to popular collectibles’ market places such as EBay (EBAY) and the company’s own Collectors Corner. Thus far, the company has only tapped less than 15% of its global market potential, primarily through U.S. operations and nascent growth abroad.
In the U.S., PCGS has a 1,200-strong dealer network with established success and a stellar reputation. Over the past four years, the company has been expanding globally and is in the process of developing its dealer networks.
PCGS grades coins on a scale of 1 to 70 with grades 1 to 58 reserved for circulated or used coins and grades 62 to 70 reserved for uncirculated and new coins.
PCGS also publishes an online price guide listing most active coins, coin grades, and daily price updates linked to demand, supply and the prices of gold, silver, platinum and palladium. The company also offers a Mobile PCGS Price Guide that’s available on the Apple App Store.
PCGS offers coin facts with high resolution images, availability, auction prices, technical specifications, detailed rarity estimates and encyclopedic content and tables – all of which promote value-based commercial decisions.
PCGS certified top-selling coins include a 1794 Liberty coin that sold for an all-time high of $10 million and a piece that sold for $3.9 million in 2013.
PSA and PSA/DNA Authentication Services Fit Well with Growth Strategy
The company founded PSA (Professional Sports Authenticator) in 1991. PSA now serves 20% of the total available market through a 150-strong dealer network backed by an online price guide that tracks certified card values, with over 500,000 certified PSA items on auctions website Ebay.
CU started PSA/DNA Authentication Services in 1998 and now serves roughly 75% of the total available market with 22 million items certified to-date with an estimated market value of $1.8 billion.
PSA’s strong value proposition is evident in the price appreciation that follows PSA authentication and certification. For example, a 1967 Topps Mickey Mantle autographed baseball card had an unrated value of $250 but sold for $68,676 at an auction in October 2013 after being authenticated by PSA.
PSA/DNA also gives collectors access to Set Registry software through which they can track, organize, grow and monitor their collections, track cost and value, and interact and trade with fellow hobbyists and buyers/sellers. The Set Registry serves as an online social exchange for collectors and has 75,000 Registered Sets of coins, 100,000 Registered Sets of trading cards, and other memorabilia. The Set Registry also has a Chinese version for the company’s growing Asian market.
Subscription-Based Certified Coin Exchange Enhances Liquidity
CU’s Certified Coin Exchange (CCE) is a dealer-to-dealer subscription-based network with over 600 members and facilitates coin transactions sight unseen with a rules-based trading system. CCE typically has over 200,000 bid-ask prices for all types of certified coins.
CU also has a Collector’s Corner marketplace which acts as a social media portal for hobbyists, dealers and collectors with coins, cards, currencies, stamps and other items available for trade. This feature-rich portal’s value, for example, is not fully reflected in the company’s valuation.
Experienced Founder-Led Management Team Has Developed Enviable Brand, Delivered Excellent Returns
Robert G. Deuster serves as CEO and was appointed in October 2012 and was earlier CEO of a publicly-traded technology company. He has extensive management, sales and marketing experience and serves on several Boards. His management and independent Board experience are critical skills that have helped drive growth at CU.
David G. Hall serves as President and Director and has been at the firm since its founding in February 1999. Earlier, he served as CEO of PCGS, Inc. for thirteen years. He is widely credited with developing independent third party grading of coins and is widely respected in the industry.
Joseph Wallace serves as CFO and has been with the company in finance positions since June 2004 when he joined as Controller. He holds a CPA degree.
Over the years, management has carefully steered the company with strong focus on a clean, debt-free balance sheet and dividend growth. Over the past 12 months, management has delivered robust double-digit returns and grown sales and earnings at close to 25%.
Record Q4, FY2014 Results with Double-Digit Gains
In August 2014, management reported fourth quarter results with revenues up 20% to a record $16.5 million from $13.7 million in the year-ago quarter. The $2.8 million increase in revenue was driven by a 27% jump in PCGS service revenues which contributed $2.5 million of the $2.8 million increase in revenue. Revenue from cards and autograph services was up $300,000 or 9%. Fourth quarter revenues received a $1.4 million boost from Baseball Hall of Fame coins that the U.S. Mint released in April 2014.
On a full year basis, FY2014 service revenues were
up 25% to an annual record of $60.5 million from $48.5 million in FY2013. The annual gain in revenue was driven by a 33% jump in coin service revenues and a 13% gain in the cards and autographs segment. PCGS gains reflect continuing strength in the coin market since the second half of fiscal 2013.
International operations saw a 5% increase in coin service revenues in Q4 and a 6% increase for the full year, with growth exceeding FY2013 by a few percentage points.
The company also reported an increase in gross profit margins to 64% for Q4 and 63% for FY2014, up from 63% and 62% respectively. Margin gains flowed to the bottom line with a 15% increase in operating income to $3.8 million in Q4 and a 31% gain in FY2014 to $12.5 million. After taxes, income from continuing operations increased 20% to $2.4 million or $0.29 per diluted share in Q4 and to $7.4 million or $0.90 per diluted share for FY2014.
Cash from continuing operations was up 33% to $12.7 million for the full year.
At quarter end, the company had $19.9 million in cash, $2.5 million in property and equipment and $35.6 million in total assets, with zero debt and total stockholders’ equity of $20.6 million.
Collectors Universe has a strong brand, a dominant market position and has only penetrated a small portion of its total addressable market. In addition, the company is in the midst of successfully leveraging its brand to grow its dealer network in Europe, Hong Kong and China, and has localized its online exchange portals for Chinese speaking customers. The company has a pristine balance sheet with zero debt and strong growth in cash from operations (up 33% in FY2014). Management is committed to dividends, which currently yield 6.1%. At $21.40 (as of 9/26/2014), the company’s shares offer compelling value for small-cap capital appreciation and dividend growth investors.