Can Activists Turnaround This Dying Company?
Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Ambassador Group (NASDAQ: EPAX) is an educational travel company that specializes in international travel for students, athletes and professionals. The stock has not done well since peaking at over $40 per share in October of 2008; it currently trades at $4.96. There are positives despite the sell-off with involvement from activist investors working to unlock value. It has cash per share of around $2.12 and no debt, has a dividend yield of 5%, and it generates positive cash flow. The company has lost travelers at an incredible rate, but the market for their business still exists; they just lost touch with how to reach it.
The number of travelers (the company calls them delegates) has dropped from a peak of 52,661 in 2007 to 41,929 in 2008, 34,248 in 2009, 26,657 in 2010 and 23,928 in 2011. In 2012, again the number will likely decline from the previous year’s level. The magnitude of the decline indicates significant share loss along with an industry decline. Management is very late in adjusting to a new world.
What is changing now?
Activist value investors figured this out and have pushed some changes. A change of management also makes some sense at this point. The current CEO has been in place since 2001 and his wife is the VP of Marketing. Ambassador has started to address marketing, but it probably needs a lot more work and new leadership. The business is getting “right” sized with cuts to SG&A and other cost cutting measures. It is divesting non-core assets and buying back shares. Additionally, insiders are buying blocks of shares above the current trading range. All of this is indicative of a pretty strong bullish sentiment. If the shares fail to respond to the improvements, Ambassadors may be a good candidate to take private which would benefit any shareholders.
Historically, Ambassadors used group meetings to market and converted those attendees to future travelers. However, people are not attending their meetings in the same numbers as before. Ambassador has started to use web meetings and more targeted mailings with limited success but it’s a start. This company was ripe for a management change or at least a rethinking of their approach if it wants to see growth again.
The asset sales could bring in additional cash of $1.60 - $1.80 per share. First, the company owns its headquarters, which is too large for the current size of the organization. It has listed it on the market for a little over $13 million and assuming it sell for something close to that, adds at least another $0.60 - $0.65 per share of cash.
Ambassador also owns bookrags.com, a site it purchased for $18 million in 2008 that is a collection of book summaries. Basically, it helps students avoid reading an actual book. The site has grown since its purchase and really has no synergies with the company's travel business currently. Its sale would likely unlock more value for EPAX shareholders since it is trading at EPAX’s depressed multiple and not that of websites/social media like Amazon. Amazon, the online retailer of books and, in the last few years, everything else, trades at a PE of 155. EPAX has a PE of only 22. Bookrags.com is likely to grow in the future in the ecommerce space just like Amazon, so it deserves a higher valuation. Sale of that business at or above its purchase price is possible and could generate cash per share of $1.00-$1.15.
Cost cutting measures can further improve profitability. SG&A is slightly above 2007 levels when the number of travelers peaked. This again highlights the high level of mismanagement at EPAX and the need for changes. The multiples compared to travel companies like Expedia (NASDAQ: EXPE) are significantly depressed. Although these businesses are different, improving profitability and at least having the number of travelers flatten off should lead to a valuation multiple expansion. Expedia has improved its top line by over 17% in the last year and has experienced a 100% gain in the market. Ambassadors on the other hand has dropped 16% in terms of sales and has seen a 7% gain in the market in the last 52 weeks. As a result, Expedia has a P/B of 3.6 while EPAX has a price equal to its book value.
Owning EPAX shares should be viewed like owning an option. The downside is limited by cash and asset values and the risk is asymmetric risk. It appears the Board will unlock value to shareholders. In 4Q and 1Q the company typically loses money, but if the firm shows stability in order activity, it may be time to buy. That said, the competence level of management is in question. Failure to make some changes at the top level by activists could result in further declines in travelers and declines in the share price.
mthiessen has no position in any stocks mentioned. The Motley Fool owns shares of Ambassadors Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!