In a bid to burnish its reputation as a leading auction house of stamps and coins, Greg Manning Auctions (NASDAQ:GMAI) appears to have extended itself too far. Even as it reported higher third-quarter profits over the prior-year period, sales fell, and it missed the targets set by the lone analyst who covers it. Investors subsequently punished the stock, dropping it 15% on Friday.
You can't really blame the analyst or investors for expecting more. Greg Manning Auctions essentially sold itself off in 2003 to AfinsaBienes Tangibles, a Spanish collectibles company, touting the fact that it would serve to smooth out the company's revenues. That those revenues continue to be choppy has apparently unsettled the market for the auction house's stock. Since the two companies expanded their agreement last October, Greg Manning's stock has been on a roller-coaster ride, rising and falling almost monthly, it seems, but never reaching its former heights.
The landscape for auctions is a highly competitive one, and there are few companies with a national presence specializing in the philatelic and numismatic fields as Greg Manning does. It does not really consider itself a competitor of Yahoo! (NASDAQ:YHOO) or Motley Fool Stock Advisor recommendation eBay (NASDAQ:EBAY), even though they are auctioneers too, because they are primarily consumer-to-consumer auction sites. Greg Manning is a business-to-business and a business-to-consumer auction house. Moreover, it feels that the growth of eBay and Yahoo! actually helps its business, as it provides more liquidity to the collectibles market. Companies and individuals will buy large lots from Greg Manning and turn around and sell them in smaller blocks on the online sites.
When the deal with Afinsa was announced, it definitely had some folks scratching their heads. Greg Manning gave up 72% of its ownership to Afinsa, which in return guaranteed to obtain the stamps and coins it sold in Europe exclusively from Greg Manning . While there were no guaranteed revenue minimums, the deal had generated some $65 million in sales for the first eight months of the original five-year term. That worked out to around $250 million over the life of the agreement. Thus, when the two companies expanded the contract to 10 years, they estimated the transactions between them could total as much as $1 billion.
That explains some of the reaction to last week's news that revenues fell year over year, from $82 million to $74.7 million. Greg Manning says that the shortfall was primarily due to lower inventory sales to Afinsa, but it quickly said that it should be made up -- and then some -- in the fourth quarter. It's expecting the current quarter's revenues to far exceed internal guidance. Investors should hope so, since the first half of the year tends to be the slowest.
The auction company makes money from several types of sales. In addition to hosting traditional auctions, it buys inventory from third parties. Greg Manning can then turn around and sell those goods in its capacity as a merchant/dealer. It also takes on consignment sales from parties looking for immediate cash instead of waiting for their items to be sold at auction. With its agreement with Afinsa, Greg Manning has said that it will sell only third-party inventory to its parent so as to avoid any conflicts of interest.
The money it generates from commissions -- 10% to 15% on both sides of each transaction -- is almost all profit, while margins from inventory sales can range from the high single-digits to as much as 25% on coins. It incurs expenses primarily for taking possession of the items for sale, inspecting and describing them, guaranteeing their genuineness, and shipping the items to buyers. It spends little in the way of capital expenditures. Being free cash flow positive is not a problem for Greg Manning, since it really needs only to finance its working capital requirements. The company also has nearly $30 million in cash and equivalents.
Stamp and coin collecting is not a hot growth market, to be sure, and the company has suggested the industry will grow around 7% to 9% a year. With its dominant position in the niche, however, its ability to make acquisitions of competitors, and an agreement to have a ready buyer in place -- as complicated as that agreement may be -- Greg Manning Auctions should be poised to capture whatever growth the market may engender. I see the company making a bid to double its size over the next three to five years, and I'm sold on it being an attractive investment at current prices.
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Fool contributor Rich Duprey owns shares in Greg Manning Auctions, but does not own any of the other stocks mentioned in the article. The Fool has a disclosure policy.
