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Ambassadors Group (EPAX)

December 14, 2014

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.

  1. dgforvalue permalink

    The company only makes money in 2 of 4 quarters due to seasonality so annualized earnings based on one profitable quarter will not give you a good picture.

    Might still be something though, I have also looked at it for a couple of years, but I am not sure that they will ever manage to get back to consistent profitability.

    • Thanks for the comment. Yes, obviously you are right. I was just projecting out the latest numbers as a ‘what if’ not because I think they can sustain those results. I was oversimplifying. My point was that if they can sustain some kind of profitability then the value of the company is greater than the cash on the balance sheet. Upside with little downside.

  2. Interested Party permalink

    Very interesting idea. Few questions:
    1) Cash – Your $2.22 cash number excludes proceeds from the building sale right? Using your 80% math, I get ~ $2.61/shr of cash.
    2) Cash uses – where did you get the 20% of cash is needed for operational expenses from? Is that something they said or just a ballpark assumption from you? Why don’t they return the cash to shareholders (either through 1x special divvy or buyback)? Are you worried they are going to mismanage the cash position / buy operations in an unrelated business?
    2) Building – any sense on what the monthly rent / lease payments would be on the property?
    3) Bandera / Lane Five – any experience with them? What other situations have they played in to effectuate positive change?
    4) Revenue stabilization – still feels like a melting ice cube here? In their 10Q, they say that they expect 2015 Revenues < 2014 Revenues? That doesn't seem to suggest stabilization anytime soon? It appears that restructuring is pretty much done at this point. Any sense of how variable their cost structure is? ie., can they still be profitable in a declining revenue environment?
    5) Underlying business – why is the underlying business suffering? I've never heard of this Ambassador program but I don't think travel abroad has decreased that much, so it appears these guys are losing market share. Why and to whom?

    • Thanks for your questions, Interested Party.
      1) yes, my cash numbers were as of Sept. 30 and the building was sold subsequently.
      2) My 20% number was pulled out of the proverbial hat. I actually don’t think they need even 20% as you can see that they keep most of this cash invested in municipal bonds or municipal bond funds (which is another subject altogether – I happen to think that is a good bet at the moment)
      2*) They are remaining in their old building only temporarily while they look for new (smaller I presume) quarters… no idea how much that will cost, but the move is a good sign=save money.
      3) No good background on Bandera’s other workouts. Lane Five is a break off from Legg Mason (value investors) so that gives me some comfort. Both are significantly underwater.
      4) Yes… ice cube is a good analogy. I’m wondering if they are not going for a liquidation if they can’t find a buyer of the existing business. Best value of course is if they can first stabilize it then sell.
      5) Don’t know about this.. I haven’t looked into it enough. I was surprised that they closed their Peking office; I would have though that might be the engine to pull them out of the tailspin, so that shows you how little I know about this business

  3. Interested Party permalink

    This is scary! Can heir cost structure also dramatically change to reflect lower revenue? They should shut business down and liquidate!

    As of November 2, 2014, enrolled revenue for 2015 travel programs was $77.5 million, down 34.6 percent from the same point last
    year, based on enrolled travelers of 12,115 compared to 17,955. Enrolled revenue for the Company’s core product, Student
    Ambassadors, is down 35.8 percent to $72.4 million compared to $112.9 million at the same date last year, based on enrolled
    travelers of 10,246 compared to 15,853.
    Enrolled revenue consists of estimated gross receipts to be recognized upon travel of an enrolled participant and revenue
    recognized for any delegates who have completed travel for the travel year referenced . Reported net enrollments consist of all
    participants who have enrolled in the Company’s programs less those that have already withdrawn, including travel that has been
    completed. Enrolled revenue may not result in actual gross receipts eventually recognized by the Company due to both withdrawals
    from the Company’s programs and expected future enrollments.

    • Yes, ice cube was the analogy Interested Party used. Very apt. I don’t know if they can stabilize the business but there is downside protection (cash and activist investors on the board). Remember I’m paying less than cash on the balance sheet; worst case in a liquidation I expect to get 110-120% of my money back.

      • Interested Party permalink

        That assumes that cash doesn’t get hemorrhaged away as they try to stabilize business. Given the (small) amount of cash they need to run business, why won’t they return cash to shareholders?

  4. Epaxer permalink

    Any follow up thoughts on liquidation value / run off value of bizness?

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