Escala's Smart Acquisitions

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The auction house industry is undergoing some consolidation, with major players like Sotheby's (NYSE: BID) and Afinsa Bienes Tangibles bidding on the smaller houses. Greg Manning Auctions was one of the biggest of the smallest until Afinsa acquired a majority stake in the company two years ago and then acquired the rest of the outstanding shares last month, to form the more worldly sounding Escala Group (Nasdaq: ESCL). Afinsa, the world's largest stamp dealer, has been buying up a number of players that have contributed to the growing strength of the whole.

When Escala reported first-quarter earnings last week, it was apparent that it has benefited from acquisitions of its own. Revenues jumped from $48.1 million in 2004 to $559 million this year on the strength of its purchase of A-Mark Precious Metals, North America's largest privately held precious-metals dealer, which contributed $494 million. Even without the contribution of A-Mark, revenues were up 34% when compared with last year.

The strong top-line growth, whether you include the acquisitions or not, continues to go straight to the bottom line, where net income grew 81% over last year. Gross profits of $27 million represent 53% growth, while margins increased to 40.5% of collectibles, compared with 35.7% for the comparable period last year.

As I noted last week, Escala has put the pay of its management to a shareholder vote, though with Afinsa controlling 78% of the stock, Escala will pay its executives whatever Afinsa decides it will pay them. The company has also eliminated stock options, yet as many companies have done in the wake of the requirement from the Securities and Exchange Commission that companies must expense stock options, Escala accelerated the vesting of underwater options so that they will not appear as an expense in future financial statements. At a cost of $2 million, the acceleration simply serves as a mask to shareholders of the costs associated with the options previously issued. It's a rather underhanded policy -- one that many companies are adopting -- but it's one that I'm reluctantly willing to accept, since it seems to have also exorcised the demon of option grants as well.

The company is otherwise performing admirably, and the acquisitions it's making are an example of smart mergers that fit with the company's core markets. The 7% to 9% growth that Escala foresees seems to belie the facade that stamp collecting and coin trading are refined, tweedy industries.

Appraise the industry with these related Foolish articles:

• Auction House Rolls Out New Identity
• Escala Puts Pay to a Vote
• Greg Manning Bids for Higher Profits

Fool contributor Rich Duprey owns shares of Escala but of no other companies mentioned in this article. The Motley Fool has a disclosure policy.