A stock that opens the day at $32 a share, gets cut in half by the close of the market, and then the following day is cut in half yet again, is a company suffering from a serious case of "don't-want-itis." Escala (NASDAQ:ESCL), the U.S.-based coin and stamp trading house that was formerly known as Greg Manning Auctions, is just that stock -- and investors most definitely don't want this stock right now.
As I detailed yesterday, the homes and offices of Forum Filatelico and Afinsa Bienes Tangibles -- the parent company of Escala -- were raided by Spanish authorities and nine people were arrested on suspicion of various criminal charges. Essentially they are being charged with running a glorified confidence game, where their ability to pay guaranteed rates of return is based upon an even greater ability to get ever more investors to fork over more money to invest in its stamps. Some 350,000 Spaniards are at risk of losing their investments in this scheme, since the authorities have shut down the two company's operations.
Bearing the brunt of this is Escala, which is not yet suspected of any wrongdoing and is still in business. The problem for the U.S. subsidiary is that it is 67% owned by Afinsa, and most of its revenues -- 58% in the latest quarter and 62% over the past nine months -- are generated through sales to the parent company in a deal that was hammered out back when Afinsa took its large stake. Last November, when I highlighted my concerns with this situation, I said that any sins of the parent could be visited on the offspring, and that's what happened yesterday.
In discussing this with my Foolish colleagues, the possibility that this development could put Escala out of business was raised. Could its stock fall all the way to zero?
While it is indeed a possibility that the stock and the company will be so tainted by the scandal that few if any investors would want to buy shares in it, I do not think that will happen. I see that there is still value in Escala, just not as much as there once was. What that value is, though, may be difficult to sort out for awhile.
Escala generates revenues in three ways: through exclusive sales of inventory to Afinsa; through sales of inventory to non-related parties; and, most recently, through trading precious metals, specifically gold, silver, platinum, and palladium. Should Escala's affiliation with Afinsa be permanently damaged, it would be a stiff blow to its collectibles revenue, which totaled $77.8 million, $45.5 million of which was from Afinsa. That would leave just $32 million from other customers. Yet its trading revenue, the revenue it gets from precious metals, would not be affected, and that totaled $1.1 billion for the quarter.
Gross profits, though, would take a hit. Escala would generate only $4.5 million from its collectibles sales and just $2.8 million from trading, the margins from which are apparently pretty thin. It also receives commissions from items sold at auction, all of which are pure profit and totaled $3.6 million. That would give us total gross profits of about $11 million, or one-third of the profits it realized as the stepchild of Afinsa. If we imagine that all else was equal in this scenario, I can't see Escala being worth more than $7 or $8, even using optimistic assumptions.
Escala definitely has value left in it, just not nearly as much as one of its rare stamps at auction. With it now trading in the mid-single digits, some investors may be tempted to swoop in and scoop up some shares -- thinking that the distressed stock may be ripe for a turnaround. I don't think Escala is going to zero, although it very well could. From a value perspective, it's far too early to consider buying any shares, and I could easily see it falling by half yet again.
The coin and stamp auction house isn't licked, but don't put a bid in for it just yet.
However, you can bid up these related Foolish articles:
- Escala Is Stamped Out
- Auction House Rolls Out New Identity
- Fear Collects at Greg Manning
- A Glorified Confidence Game?
Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. The Motley Fool has a disclosure policy.
