Value Find: Collector's Universe Inc.
An outsized dividend, rock-solid balance sheet and the growing potential for an operational turnaround make up for several quarters of lackluster performance at this small-cap play.
Santa Ana, Calif.-based Collectors Universe Inc. (Nasdaq: CLCT) may not be well-known on Wall Street, but its various operating units are distinguished in the collectibles industry. Founded over 20 years ago, the $125 million market capitalization company provides authentication and grading services to dealers and collectors of high-value collectibles such as coins, sports cards, autographs and currency. Collectors Universe is also a publisher of various collectibles price guides and is the operator of the Expos Unlimited collectibles trade shows.
In the fall of 2005, Collectors Universe entered the diamond grading and authentication business with the acquisitions of Gem Certification & Assurance Lab (GCAL) and a complimentary company called Gemprint Corp. Then, in August of last year, Collectors Universe broadened its focus on this new sector with the acquisition of American Gemological Laboratories (AGL), a provider of grading and authentication services for colored gemstones. While Collectors Universe’s new diamond and gemstone grading businesses are filled with promise, they have severely depressed the company’s profitability over the past two years and left investors skittish.
Collectors Universe management now claims that it intends for its diamond grading business to be operating at or near cash-flow breakeven by this holiday season. It expects its younger colored gemstone grading business to take longer to turn the corner. An end to the cash-burning ways of its jewelry grading businesses can’t come soon enough for Collectors Universe investors.
For the fiscal year ended June 30, Collectors Universe saw its revenue increase nearly 10% to $40.5 million (4% of this revenue growth was organic), while posting an operating loss of $0.74 million, or $0.09 a diluted share, compared with an operating profit of $3.4 million, or $0.39 a diluted share, a year earlier. The full-year loss was driven by an increased operating loss of $4.1 million by the jewelry business. Operating cash flow for the year was $3.5 million. This compares with annual cash flow of $7 to $8 million for Collectors Universe from its traditional collectibles businesses before it decided to broaden its focus to the jewelry segment in late 2005.
While Collectors Universe has done a poor job in recent quarters of managing investor expectations (and the march to break-even in its jewelry operations has taken longer than some had expected), it seems serious about rewarding shareholders. Collectors Universe has now hiked its dividend by 200% from the initial quarterly dividend rate that it announced just last May. The company now pays out a quarterly cash dividend of $0.25 a share, good for an outsized 6.7% annual yield around current price levels. This yield is great by any measure, particularly for a small-cap company. For comparison, the yield on the 10-year Treasury note is around 4.6%.
Collectors Universe’s recent results certainly don’t support paying this outsized dividend from current cash flows; however, the company argues that, if it can get its jewelry operations to cash flow break-even, it will be able to “cover” the new dividend out of the cash flow generated from its solidly profitable, and generally reliable, collectibles operations. In addition, Collectors Universe continues to sit on a rock-solid balance sheet. The company ended June with $42.4 million in cash, good for $5 a share in cash, and no debt. While we don’t like to see even a temporary “return of capital,” instead of paying-out shareholders from internally generated cash flow, Collectors Universe has the resources to easily cover its dividend for many quarters.
The recent struggles at Collectors Universe haven’t stopped one generally savvy institutional investor from continuing to up its stake in the name. Shamrock Activist Value Fund, an investment manager affiliated with the Roy E. Disney family, holds a nearly 14% stake in Collectors Universe and was last a buyer of the stock at the $14 level in June. A managing director of Shamrock was appointed to Collectors Universe’s board in July. We like seeing a proven activist investor taking an even more active and committed role in this small cap.
We think it’s worth keeping in mind that this name was posting annual EPS of $0.70 prior to entering the jewelry-grading business. We don’t expect Collectors Universe to regain this level of profitability in the near term, but earnings should begin to build back in this direction over the coming quarters. Fair value on this niche franchise could be at least $18 a share. While 20%-plus upside isn’t spectacular, when the hefty dividend yield is thrown in (especially in a now falling interest rate environment), the risk-reward on Collectors Universe turns decidedly positive.
Bottom-line, Collectors Universe looks like an interesting “value find” below the $15 level for lower-risk oriented investors.
About the Author
Contributing author Matt Ragas is an investment writer and analyst with ten years of experience analyzing small and microcap stocks, with a particular emphasis on value and turnaround situations.
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