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Finding the Hidden Value in Calamos Investments

Calamos provides investment management advice and services to institutional and individual investors. The firm offers more than a dozen mutual funds and five closed-end funds, as well as separately managed accounts. Calamos has expanded its fund lineup to include equity, fixed-income, and alternative investments.

Calamos has been adding more mutual funds to expand investment options to investors. The company launched the Discovery Growth Fund, which focuses on small and micro cap equities. The company launched the Evolving World Growth Fund in 2008 to offer investors the opportunity to invest abroad. The fund invests in developed and emerging markets and can invest in assets across sectors, countries, market caps and security types.

Besides for funds, the company has also been seeking to expand by offering services to institutional investors such as pension funds, 401k plans, banks and insurance companies etc. The company is continuing its recent focus on large strategic distribution partnerships with national and large regional broker-dealers domestically. In addition, the company is expanding its offerings internationally by hiring a U.K.-based senior sales professional to enhance the company’s presence in the U.K. and continental Europe.

Calamos has a unique structure for a publicly traded company. Calamos Asset management, the public company, owns 21.7% of Calamos Holding LLC (the operating company). The rest of Calamos Holdings LLC is owned by the Calamos family. As can be seen in company fillings; net income for shareholders is calculated after subtracting Net income attributable to non-controlling interest in Calamos Holdings LLC, and Net income attributable to non-controlling interest in partnership investments.

  • Market price-$13.00

  • Insider ownership-80%

  • Float-20million

  • 52 week range-$8.45-$15.33


Corporate structure

The structure of the board is a cause of some concern. Five out of the six board members have a connection to Calamos. Another concern is the fact that insiders control nearly 80% of the company stock.

The CEO, John Calamos’ base salary for 2009 is $820k. However, John P. Calamos, Sr. and Nick P. Calamos decided to continue their voluntarily imposed reduction in their annual base salaries at $425,000 and $325,000, respectively, as part of the company’s continuing cost containment efforts. Total compensation was much higher. John Calamos and Nick Calamos had total compensation of $3.5m and $2.3m respectively.

AUM [assets under management]

Calamos has $33.4b in AUM as of Q310, across a wide range of investment strategies/asset classes, including equity 54%, Convertible 21%, Fixed Income 9%, Total Return 6%, and Alternative investments 6% of AUM.

The Calamos Growth fund has $8b in assets and a three star rating from Morningstar. Since the fund’s inception in 1990, it has produced returns of 13.86% per annum versus 8.76% for the S&P 500.

The Calamos Growth and Income Fund has $4b in assets and a five star rating from Morningstar. Since the fund’s inception in 1988, it has produced returns of 11.81% per annum versus 8.94% for the S&P 500.

The two funds combined make up 36% of Calamos’s AUM. In addition the two funds provided 34% of total revenue as of Q310. The two funds are managed with a focus on low volatility. The aim of the funds is to invest in stocks with a low beta which will outperform the S&P500.

Net outflows during Q310 were ~$400m from all assets, and $140m from mutual funds in particular. However, the $140m number was primarily due to net outflows of $325 from the Growth Fund. Excluding the Growth Fund, the company generated net inflows of more than 140 million in other funds.

AUM and flows (Estimate for FY10 is from Credit Suisse)

  • Q310: $32.6b AUM, net outflows $400m, market appreciation $3b

  • Q210: $29.9b AUM, net outflows of 710m, market appreciation of $(2.3b)

  • Q110: $32.9bAUM, net outflows of $550m, market appreciation of $800m


Flows

  • FY10E: $32.7b AUM, net outflows of 2b, market appreciation of $2b

  • FY09:$ 32.7b AUM, net outflows of 110m, market appreciation of $8.8b

  • FY08: $24b AUM, net outflows of 4.5b, market appreciation $(17.6b)

  • FY07: $46.2b AUM, net outflows of 3.6b, market appreciation of $5.1b

  • FY06: $44.7b AUM, net outflows of 820m, market appreciation of $1.7b

  • FY05: $43.8b AUM, net inflows of 3.6b, market appreciation of $2.2b


Balance sheet

Effective March 1, 2009, CAM de-unitized its ownership structure and as a result, Calamos Interests’ ownership in Calamos Holdings LLC is no longer reflected in the diluted share count presented in CAM’s financial statements. Therefore, the determination of the market capitalization of the fully consolidated business cannot be easily determined by the product of share price and weighted average number of shares. There is a divergence within the financial community on how to calculate CAM’s market capitalization with some basing it solely on the outstanding share count of CAM’s Class A common stock and others grossing-up CAM’s outstanding Class A shares by its 21.7% ownership in Calamos Holdings LLC.

The company reported in their Q310 that CAM holds assets which include; cash equivalents and current income tax receivables with a book value (and approximate fair value) of $34.4 million. Section 754 of the IRS allows CAM to reduce future income tax payments by approximately $8.3 million annually.

CAM also has a DTA with a NPV [net present value] of $46.2m (using a discount rate of 12%). Taking the DTA of $46.2m and cash of $34.4m equals assets of $80m owned by shareholders. Dividing the $80m in assets by the 19.9m shares attributable to CAM produces approximately $4 of assets per share. Subtracting $4 from the current share price of $13 leaves shareholders with $9 per share.

The operating company has $59m in cash, $295m in investment securities, $40m in partnership assets and $125m in debt. Net cash and assets equal $269m. When we divide by 92m (the total number of shares) we get $2.90 a share in net cash and assets. We subtract the $2.90 from the $9 and are left with $6.10 per share. Operating income for Q310 was $31m. Using a run rate of $31m produces $124m in pre-tax earnings. Assuming a tax rate of 39% after tax earnings are $76m. Divided by 92m, shares yield $0.82 per share.

Now using “the share price” of $5.10, the stock is trading at a P/E of 7.4 net of cash, DTA and investments (as opposed to a P/E of 14.6 before adjusting for cash, DTA and investments). Calamos is extremely cheap compared to competitors. Franklin Resources trades at 16.5 P/E ratio net of cash. Eaton Vance and T. Rowe Price both trade at a P/E ratio of 19 net of cash.

Although Calamos does not offer nearly as many services as these competitors it does not warrant such a low multiple of P/E. Using a multiple of 12 and adding back the $6.90 we subtracted earlier leaves us with a target price of ~$24.

To calculate enterprise value on this company was very difficult. I spoke to two smart analysts who researched this stock in depth and both came up with different numbers. Based on the way the company details its capital structure in the Q and K, I came up with a third number. I spoke to Investor Relations and the person did not even know what EV was! She refused to connect us with the CFO, so I will explain how I calculated EV below:

EV is computed as follows: $13 current share price minus $4 in DTA and cash owned by the public company equals $9 per share. $9*20 o/s gives $180m. Then we divide $180m/21.7% (the public’s share of Calamos Holdings) gives an imputed market cap of $829m. We add back cash and DTA owned by shareholders to get a $909m. To get EV, add $125m debt and subtract $295m in investment securities, $40m in investment partnerships, and $59m cash (owned by operating company) gives an EV of $640m. $97.2mn for EBITDA for the first nine months of 2010, EBITDA for the past 12 months ended Q310 is $135.7m. Dividing EV/EBITDA yields 4.7x ratio.

The stock seems very attractive based on both P/E and on EV/EBITDA.

There are two main risks with the stock (which I discuss very briefly):

1. The spectacular growth in ETFs is making it harder for Asset managers who only offer open and close ended funds. This risk applies to all asset managers without many ETFs, and is therefore a not a company specific risk.

2. The stock market seems richly valued (as I document here-http://www.valuewalk.com/stock-market-valuations/stock-market-valuation-january-1st-2010/). If the stock market were to have a large decline there would obviously be much market depreciation, and there would likely be large outflows as investors panic and sell as the market goes down. This would obviously hit the top line very hard which would carry down to the bottom line.

Disclosure: I have no positions in any stocks mentioned.

H/T to Tim Eriksen of http://eriksencapital.com/, who was one of the analysts mentioned in the article.

http://www.valuewalk.com/

About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website


Rating: 3.7/5 (18 votes)

Comments

hpmst3
Hpmst3 - 3 years ago
e
yswolinsky
Yswolinsky - 3 years ago
Thanks Hugh,

Our firm was doing research for an asset manager with over $2billion under management. You would think they would be very eager to talk with us since their market cap makes Calamos either micro or small cap (depending on how you define market cap here, and of course how you define small and mid)! It was shocking how IR did not know basic finance very unprofessional, she also does PR and was trying to sell us her products lol!
hpmst3
Hpmst3 - 3 years ago
e
yswolinsky
Yswolinsky - 3 years ago
Hi Hugh,

The PR person said the CFO was too busy right now plus she did not understand the question so there is no way she could pass it on.

I believe you are right in your first regard. I think the DTA was generated when they had the IPO in 04.

In terms of enterprise value I spoke to the analyst at a large firm (do not want to mention the name) who covers the stock (and wrote up a 60 page internal report on the company which he sent to me). I also asked Tim (mentioned above) who analyzed the stock in depth both of them came out with diff numbers for EPV. I tried to calculate it using the formula the company provides at the end of the latest K and Q.

Not sure what they are going to do with the cash. It seems like they should pay a higher dividend or buyback shares, can't say they will.

I am not sure about the deunitization. I do not really understand the difference because the shares do not float and I believe did not float before the unitization (you can correct me if I am wrong). I do not know what other differences the deunitization would make besides for float, although I have never encountered a company before

Part of the cash ($~34) is separate. That is why this stock seems so different than what a screener would show you. Look at the bottom of the latest 10-q or k.
hpmst3
Hpmst3 - 3 years ago
e

yswolinsky
Yswolinsky - 3 years ago
I will try to listen in on the next call. FYI I think the "total shares outstanding" is 92m not 97m as you stated.
hpmst3
Hpmst3 - 3 years ago
e
hpmst3
Hpmst3 - 3 years ago
e

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