Ambassadors Group (EPAX)
As I noted in my last post about restructuring my portfolio, I’ve been adding shares of small ‘special situation’ companies. The next one up here is Ambassadors Group (EPAX)
The company describes itself as ” a leading provider of educational travel experiences and online education research materials primarily engaged in organizing and promoting worldwide educational travel programs for students through a direct to consumer revenue model”, but I view it as a soon-to-be positive operating income net-net. Revenue has been declining for the past 5 years, dropping from $69 million in 2009 to $51 million in 2013. In 2014 the annual running rate based on the first 3 quarters is about $39 million. With revenue dropping, earnings dropped too, from $1.05 per share in 2010 to a loss of $.42 per share in 2013. So why would I be interested in such a company? For one thing the company had a book value of $2.78 per share as of Sept. 30, 2014, and all of that is in CASH (or equivalents, obviously). Oh, did I forget to mention NO DEBT! Furthermore, the company seems to have turned the corner operationally, earning $.11/share last quarter. In addition they have recently sold off the smaller of their two operating segments, BookRags, and monetized their headquarters building. This is all a result of a change in strategic direction the company went through in 2013 brought about by activists Bandera Partners and Lane Five Capital Management, owners of respectively 18% and 7% of the outstanding shares. Since 2012/2013 both of these firms have had representation on the board. A management change was effected during the first quarter of 2013 (or, more accurately, I should note that ‘old’ management was allowed to resign) and a restructuring plan was devised to rationalize and shrink the company back to profitability. I think we are seeing the fruits of these efforts with the latest quarter’s results.
What’s not to like? Well, we obviously need to see a leveling off of the drop in revenue as well as continued positive net income. In other words, the plan still needs to be proved out. In the meantime we can purchase the shares at $2.15, or less than 80% of net cash. If the company could just continue to earn 11 cents per quarter (so $.44 annually) as it did last quarter what might it be worth? Let’s look at it on a per share basis; first, the cash they don’t need for operations (most of it, so I’ll estimate that conservatively at 80% of the cash equivalents on the balance sheet), about $2.22, plus the operating business at 6 times net income (have to be conservative as they aren’t paying any taxes currently), so $2.64, for a total of $4.86, some 126% above the current share price. Now that’s a really back-of-the envelope calculation which doesn’t take into account the company’s true earnings potential or taxes or any of the other subtleties we really need to factor into a thorough valuation.
I’ve been following the company for a couple of years now but it never quite got cheap enough for me to buy… that is, until now (my opinion only…. do your own analysis!) so I’ve added shares to my portfolio as I think that end-of-year tax loss selling has severely mispriced these shares.