Stanley Gibbons, the world’s leading company serving the stamp collecting market, published its 2009 financial results last week. The firm had a very good year by every account: its revenues increased by 20% (to nearly £23.4 million in 2009), earnings per share grew by 11% (to 14.7 pence per share), cash position improved from meager £0.5 million at the start of the year to £3 million as of December 31, 2009, and the firm is debt free.
Perhaps the most important takeaway from the company’s 2009 results is Stanley Gibbons’ apparent discovery of a highly profitable business model – the firm generated £4.9 million in cash from operations, a massive increase from the £0.6 million achieved in 2008.
We will analyze this business model in detail further below, although suffice it to say that other art and collectibles businesses should pay attention to Stanley Gibbons integrated trading and information approach with its heavy focus on internet and global expansion.
As the firm is now traded at a PE of less than 9 and has a robust outlook in terms of growth and profitability, we believe that shares of Stanley Gibbons are currently undervalued at £1.4 per share. We believe that there is a nearly 50% upside potential, which leads us to increase our target price to £2 per share. We are particularly confident in this forecast as we look at the historical performance of Stanley Gibbons share price against Skate’s Art Stocks Index. The decoupling of Stanley Gibbons from the general index trade that we have observed since the end of October seems completely unjustified given the company’s strong 2009 financials.
Stanley Gibbons: Business Case
Stanley Gibbons operates three business divisions. Of these, philatelic trading and retail is by far the largest. In the highly fragmented world of stamp collecting, Stanley Gibbons is the only listed company and perhaps the largest operator in terms of volume (the company estimates that there are 60 million collectors worldwide with the global stamps trade – including postal needs – amounting to approximately $10 billion a year or anywhere between 15% and 25% of the global art trade1).
The firm has become increasingly dependent on the stamps trade for its revenues and profits over the last three years; in 2009 it derived over 75% of its sales from this segment. While it remains the least profitable of the three, stamp trading is by far the fastest growing part of Stanley Gibbons’ business and continues to command solid operating profit margins that greatly exceed 20%. Managing growth in this segment remains the key to shareholder value creation at Stanley Gibbons, a topic we detail further in this report.
The other two other business segments – publishing / accessories and autographs / memorabilia – posted no organic growth in 2009 (the publishing division numbers include results from Philatelic Exporter, which was acquired in January 2009). Both experienced a faster decline in profit margins than the core philatelic trading division. As the internet continues to redefine how collectors make trades, it will create more opportunities for Stanley Gibbons’ stamp trading division but will challenge its publishing and to a certain extent its memorabilia business. We see no growth opportunities in the publishing segment, although we do recognize its importance as an authoritative source of vetting services for stamp collectors. We believe that Stanley Gibbons must narrow the focus of its memorabilia-trading segment given that it operates in the highly competitive space of multiple online auctions and specialty internet trading operations around the world.
Managing Growth and Working Capital is Key to Stanley Gibbons’ Future Success
As Stanley Gibbons managed to achieve 28% y-t-y growth in its core philatelic trading operations in 2009 and is clearly on the way to sustaining this growth in 2010, managing working capital becomes the company’s major challenge.
A classic concern of any expanding trading business involves exercising discipline when it comes to working capital. This is also an issue with Stanley Gibbons. The firm did very well on the inventory side – it actually managed to reduce its inventory count by 21% in 2009 against the backdrop of growth in sales. An area of concern, however, is the firm’s receivables, which ballooned from £4 million to £9.9 million in 2009. All in all, the firm’s working capital (inventory plus receivables) remains fairly significant (growing from 81% of sales in 2008 to 82% in 2009). We will watch for the following key decisions in working capital management during the course of 2010:
- Use of leverage – in an environment of consolidation and growth, we would encourage Stanley Gibbons to use leverage and unlock the firm’s own capital to finance acquisitions and further growth rather than finance working capital requirements;
- Quality of receivables – we will watch for bad debt write-offs in the company’s future financial reports as an indication of how prudent the company’s accounts receivables policy is; and
- Inventory management – we will watch whether Stanley Gibbons can continue keeping its inventory at 6 months of sales from the philatelic trading unit throughout 2010. We will interpret any increase in this ratio as a clear red flag indicating mismanagement of working capital, especially if accounts receivable remain as high as they are now.
Stanley Gibbons has ambitious growth plans that include significant improvement of its public relations, sales and customer service, as well as geographic expansion. China seems to be a major new market for Stanley Gibbons, one where the firm sees a third of its potential customers residing. The company also plans to exploit a distribution channel focusing on stamps as an investment. Finally, it plans to upgrade its online offering and acquisitions.
We believe that emphasizing growth is the right move for Stanley Gibbons at this time (including the previously discussed switch to debt financing of working capital requirements and the use of own capital for more expansion opportunities). We believe, however, that the firm must be very cautious with its growth opportunities and should pick its battles carefully. A few considerations:
- Online strategy – this should be the key strategy for the firm going forward with an objective of solidifying its already highly successful website as the #1 destination for stamp collectors around the world due to the vetting functionality offered by the catalogues and depth of price data. We believe that making the site multilingual and offering more functionality for stamp collectors and dealers is the #1 priority for the firm, and we will watch for delivery here.
- Geographic expansion – is generally the right thing to do, and we would encourage the firm to export its successful UK model (flagship store, robust online trading offering and in-depth catalogues) to other markets. However, we would be skeptical of any significant capital outlay for geographic expansion that suggests a departure from this proven business model.
- Memorabilia – this business activity lacks focus on the “contents” side. Stanley Gibbons is not an obvious destination to shop for celebrities’ autographs and collectibles unless it is somehow tied into stamp collecting (or any of the firm’s other competitive advantages). We would be skeptical of any significant investment in this space unless there is a clear strategy presented for a market that is otherwise served well by eBays of the world.
- Publishing and accessories – we do not see this business as a strategic interest in its own right, but we do recognize its importance as an add-on to the philatelic trade. Therefore, all the expansion on this side must be balanced with quick payback on the stamp trading side.
- Stamps as an investment – Stanley Gibbons recently spoke out too forcefully on the topic of stamps as an investment with discussion about launching a rare stamps fund. We have seen this before with art funds, and clearly the jury is still out on whether there is a place for collective investment in collectibles. We would be skeptical about any significant growth from a distribution channel focused on stamps as an investment and will continue to look at Stanley Gibbons as the most attractive specialty online trading and retail service for stamp collectors, regardless of the reasons for their attraction to stamps.
Stanley Gibbons stock is the only way to invest in the stamps industry around the world. Provided the firm continues to play its cards right, it will accumulate a unique global database of stamp collectors and traders – a resource that can clearly be mined for more than simply encouraging people’s stamp collecting hobby. Up-selling stamp collectors to art, books or coins is one of potential proposition and thus Stanley Gibbons is a perfect acquisition target for all the global online auctions and well-established art auction houses and booksellers.
We believe that as long as Stanley Gibbons remains focused and continues to consolidate the stamp collecting industry, it will offer significant growth opportunities to investors and an easy exit.
We like the firm and believe that it should be worth close to $100 million by the end of 2010, which is double its current market capitalization.
For the full story, including related data, please visit Skate’s Art Market Research
1 Depending on which measure of the art market one uses – see Skate’s Market Notes from March 5, 2010. Stamps are not considered to be part of the art market but rather a separate collectibles market.