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Ambassadors Group: Debt-Free Company With 1.6x Net Cash and 5% Dividend Yield

December 16, 2012 | About:
Founded in 1967 and listed in 2002, Ambassadors Group Inc. (EPAX) is an educational company primarily engaged in organizing and promoting differentiated worldwide travel programs for students and professionals. EPAX is the parent company of Ambassador Programs Inc., World Adventures Unlimited Inc. and BookRags, Inc., an educational research website. It also oversees the Washington School of World Studies, an accredited travel study and distance learning school. It has two reporting segments: 1) “Ambassador Programs and Other,” which provides educational travel services through multiple itineraries within four travel program types and corporate overhead; and 2) BookRags, an education oriented research website, which provides study guides, lesson plans and other educational resources to students and teachers.

Guru and Insider AlertsThere has been significant insider buying in the last six months, with director Peter Kamin and Bandera Partners LLC buying 421,557 shares in aggregate with an average purchase price of slightly above $5. Joel Greenblatt bought 550,000 shares in the fourth quarter of 2004 and sold them all in the first quarter of 2009.

Valuation

EPAX currently trades at a trailing twelve months P/E of 23.10 and a trailing twelve months EV/EBITDA of 5.90. EPAX achieved a 4.4% ROE for the past 12 months and a five year average ROE of 20.4%. A high P/E either reflects premium valuations or depressed earnings; EPAX belongs to the latter.

EPAX P/E-ROE Comparison

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EPAX has been profitable for every single year in the past decade but its operating cash flow turned negative for the first time in 10 years. EPAX's EBITDA margins and net margins are at their lowest in ten years and have been on the decline for the past two fiscal years, driven by weak demand for student travel, air costs and traveler acquisition costs.

EPAX Earnings-Cash Flow Comparison 1355641815226.png

EPAX Profit Margins Analysis1355642009949.png

Financial and Business RisksEPAX is debt-free with net cash of $49.8 million representing 62% of its current market capitalization of $80 million. The large proportion of net cash as a percentage of market capitalization is attributed to both the severe drop in market capitalization, and EPAX's strong free cash flow generation.

EPAX Cash-Debt-Market Capitalization Comparison1355642339863.png

EPAX's business is highly seasonal, with the majority of its travel programs delivered in June and July of each year. Sales and marketing expenses peak in the third and fourth quarters of the year and typically lags the associated revenue by nine months to a year.

The educational segment of the travel industry is highly competitive with low barriers to entry. EPAX faces competition from professional travel and adult continuing education programs, activity camps and summer camps, and other companies providing educational travel programs similar to EPAX. School teachers could also do without EPAX and organize independent programs themselves with the assistance of local travel agents.

Business Quality and Capital AllocationEPAX is targeting new initiatives with growth opportunities. In May 2008, EPAX acquired an educational website BookRags, a leading academic and research website that hosts the largest collection of online book summaries with more than 5 million unique visitors per month. BookRags’ demographic is similar in nature to that of our educational travel programs. BookRags serves as a complementary marketing channel for EPAX, as there is a 75% demographic overlay between the client bases of BookRags and EPAX's travel businesses. BookRags contributed one third of EPAX's 2011 net income. Discovery Student Adventures, started in 2009, develops and conducts international and domestic student programs for elementary through high school students using the Discovery Education trademark, allowing students to visit destinations with an emphasis on adventure and scientific exploration. This start-up venture operates with an exclusive license from Discovery Education Inc., which expires in 2016 but with an option for potential renewal. Discovery Student Adventures completed its first full travel season in 2010 and is still in the early stages of growth.

EPAX is taking actions to control and reduce costs. It targets to reduce operating expenses and more specifically direct mail campaign costs by $5 million and $2 million in 2012 respectively. EPAX aims to achieve the cost reduction targets through the trimming of personnel, overhead and support costs, and non-marketing expenditures. It is also cutting on direct mail campaign costs by strengthening third-party analytics to better target prospective travelers. EPAX plans to eliminate or reduce non-core programs and activities such as the Sports Ambassadors Program and the Citizen Ambassador Programs; and reinvest part of the cost savings in organic growth strategies

EPAX has a strong track record of returning cash to shareholders with more than 100% of free cash flow returned to shareholders over last five years. EPAX has paid dividends in every single year since 2003 and currently sports a dividend yield of 5.3%. Since 2009, quarterly dividends of 6 cents per share have been consistently paid out. EPAX's board of directors approved a $0.50 per share special dividend payable November 2012. As of Oct. 24, 2012, EPAX still has $16.2 million remaining available for share repurchase, representing approximately 20% of its current market capitalization.

EPAX Dividend Payout-DPS Comparison

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Disclosure

The author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap deep-value cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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