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The Strange World of Collector's Universe

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7

November 19, 2013 – Comments (2) | RELATED TICKERS: CLCT

Board: Value Hounds

Author: LeKitKat

Collector’s Universe began offering their professional coin grading service in 1986 and from then to now, 26 million coins have passed through their hands to be graded. In 1991 they went into trading card authentication and have graded 21 million cards. In 1999, Collector’s Universe launched PSA/DNA authenticating autographs that extended services to autographed sports memorabilia in 2004.

CLCT is a tiny company with only 8.5 million shares outstanding and insiders own 1.9 million of those and 22.5%. The company is relatively inbred and small with many former and current officers doing double duty on the board. The stock is near a 52-week high at $16 with a PE of 20 and a dividend of $1.30 for a yield of 7.7%. This makes them interesting. Why do they pay out more dividend than they make in net income? As a result, equity is fast disappearing.

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Why such a generous payout? Maybe because insiders own a lot of shares? Is the dividend for their benefit and shareholders are along for the ride? It could work as long as CLCT keeps making money.

CLCT authenticates and grades (for dealers and collectors) high-value coins, trading cards, event tickets, autographs and memorabilia. They add value to these collectibles enhancing their marketability and increasing liquidity for dealers, collectors and consumers that own, buy and sell them. They could be thought of as the Moody’s of collectibles. In order for the market to move the assets, they have to have a firm value.

Once authenticated and assigned a quality grade it’s put in a tamper-evident, clear plastic holder, or issued a certificate of authenticity, that:

• identifies the specific collectible

• gives an assigned quality grade

• labeled with CLCT brand names and logos-- “PCGS” for coins, “PSA” for trading cards and event tickets and “PSA/DNA” for autographs and memorabilia.

Coins and trading cards are under warranty and autographs and memorabilia are not. We do not warrant our authenticity determinations for autographs or memorabilia.

It’s a simple business with low capital expenses and fair margins at times. However, over most of the past 8 years, growth has been largely yawn-worthy. The last two quarters growth have seen improvement. Gross margins improved over the years and operating and net margins have been erratic from an impairment in 2008 and a tax break in 2010. Over the past three years they have stabilized at reasonable levels.

Collectors doesn’t always have enough cash from operations to pay dividends and the last three years free cash flow doesn’t cover the dividend. The company doesn’t take on debt to pay it. Cash seriously declined only in 2013 in the past three years. Cash levels were in serious decline 2007-2009. It has stabilized since then.

This isn’t a fast growth story, but the past couple of quarters are looking better. They weirdly have an enormous dividend that is sucking up earnings and decreasing equity. Maybe insiders like the dividend rather than high salaries since the tax rate is lower. Insiders own almost 23% of shares.

It’s a strange little company with a few odd quirks, but I’m not sure that makes it bad. The recent run up in price is probably due to the better growth. It’s up from $13 to $16 since July—23%. It’s now at nearly historic highs. I would have liked to find it earlier in the year. I think there is a real risk of loss of capital should earnings fall off. It is interesting though.

 

2 Comments – Post Your Own

#1) On November 20, 2013 at 12:57 PM, ikkyu2 (99.35) wrote:

The business itself is decent - not great, there are several competitors, some private - but the way the company is run is cause for alarm.  Since I sold my stake a few years ago they have diluted the stock considerably - insider ownership was only 14% then, they do a lot of officer compensation in the form of this really-high-dividend stock.

It's illegal to compensate officers in the form of dividends, but that's clearly what they do - a quarter of the dividend ought to be included under cost of sales.  When you look at the stock that way, the company's just not well run.

A lot of their grading is gold coins, too, and they're currently out of favor.  I'd be very cautious about getting in on this stock. 

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#2) On January 09, 2014 at 4:17 PM, dbtuner (< 20) wrote:

I don't agree with ikkyu2 at all. The company management is fantastic. They may be the best management team of any company I follow. They are innovative, creative, and react quickly to problems. The company is also very transparent. They display their coin grading numbers on a daily basis on their web site and their cards monthly. The stock has not had dilution, in fact they bought back 20% of shares a few years back at $5/sh through a tender offer. That was a fantastic use of cash.

They do not earn the dividend on a GAAP basis, but they do on a cash basis. Stock based compensation, depreciation, and amortization comes out of GAAP earnings but are not cash costs.

The small cash burn in 2013 was due to them opening up a second China office in Shanghai. China will be a huge growth engine for them in the future. They have no debt.

There is a huge short interest of 500K+ shares that got in over 1 year ago at around $12. At some point, they will cover en masse and cause a huge run. CLCT is my largest holding. The dividends are fantastic. 

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