Founded in 1970, The Caldwell Partners International (TSX:CWL) (CWLPF) is an executive search consulting firm. The company, through a predecessor corporation, became the first retained consulting organization in Canada to specialize in representing employers in the recruitment of executives. Today, Caldwell is one of North America's premier providers of executive searches. The company has built a solid reputation for providing successful searches for boards, chief and senior executives, and selected functional experts. Caldwell has offices in Vancouver, San Francisco, Los Angeles, Dallas, Calgary, Atlanta, Toronto, Stamford, New York City, and a strategic presence in London and Hong Kong.
The start of the fiscal 2009 year was coincident with the onset of a severe market recession through which Caldwell fared well compared to many of its competitors, experiencing only a 6% decline in revenue to $12.7 million. Mid-fiscal 2009, the company began a new strategic direction, expanding aggressively into the United States, doubling its existing number of partners and offices across North America in the process. These operations contributed approximately 10% of total operating revenues in fiscal 2009 as most of the partners joined the company in the second half, some in the final few weeks of the year. In 2010, expansion into the United States continued, with U.S. operations contributing 55% of annual consolidated revenues, resulting in a 112% increase in revenues to $26.9 million.
In fiscal 2011, U.S. operations expanded further, at the time representing 63% of the Caldwell's $34.24 million in total revenues. As a result of increases in both Canadian and U.S. revenues, consolidated revenues increased 27% over fiscal 2010 levels.
With the onset of weakened market conditions in 2012, revenues decreased by 4% over 2011 to $32.7 million. U.S. revenues, representing 69% of consolidated revenues, increased 5% while Canadian revenues declined 20%. Despite the slight revenue decline in 2012, consolidated revenues increased more than two and one half times over the past three years.
Of particular interest, Caldwell's ongoing commitment to management of its cost structure has resulted in a substantial year-over-year increase in earnings. On Nov. 15, 2012, the company reported that fiscal 2012 net earnings rose to $981,000, or $0.058 per share, from $187,000, or $0.011 per share, in 2011.
From a balance sheet perspective, Caldwell operates with a strong foundation. As of Aug. 31, 2012, the company had $3.3 million of marketable securities plus cash and cash equivalents of $6.5 million for a total of $9.8 million, or $0.57 per share. The company has no debt and its cash and marketable securities account for approximately 66% of the company's market capitalization.
Caldwell's board of directors believes that the payment of regular dividends is in the best interests of the company and all shareholders. Subsequent to shareholder approval of the restatement of capital on May 1, 2012, Caldwell has now declared three quarterly dividends each of $0.015 per common share. While it is the board's intention to continue quarterly payments, dividends for future periods will be declared at the discretion of the directors and will be dependent on the company's ongoing performance and cash flow requirements. Caldwell's current yield is an attractive 5.77%.
Management believes that the demand for executive search services in North America will grow as a result of shifting demographics. This will increase the demand for senior executives drawn from a smaller talent pool than that which preceded it, as the previous generation of executives now retires. As well, smaller entrepreneurial companies will likely become users of executive search services for the first time. In the experience of the Caldwell's senior management, entrepreneurial companies often need to recruit most of their management team from outside and, as these companies grow, additional executive search needs arise. To respond to this opportunity, Caldwell is continuing to invest in training its professionals and is developing specialized information resources and technology to serve this expanding market.
In the spring of 2009, Caldwell opened its first office in the United States. It now has 23 of its total 34 partners located in six American offices. Today, U.S. revenues represent 69% of consolidated revenues. While the environment in the U.S. continues to be challenging, there are signs that business activity may be positioned to increase. With their balance sheets flush with cash, corporations are well positioned to expand in the event of a further recovery in the U.S. In the event that capital once again begins to be deployed for expansion, Caldwell is well positioned to participate in a potential recover.
From a valuations perspective, Caldwell's trailing p/e of around 15 (based on its last 12 months earnings) does not appear cheap. However, when we factor in the company`s cash position of $0.57 per share, we find that at a price of $1.04 we are only paying just over six times Caldwell`s earnings. Given the potential for further cost containment to lead to higher earnings in 2013, the stock appears relatively attractive from a valuations perspective in its current range.
Caldwell Partners has evolved from a respected Canadian brand to a firm with a strong North American presence. In that time, revenues have increased more than two and a half times, the company has returned to profitability, and a regular quarterly dividend to shareholders has been reinstated.
That said, the environment is not ideal at present for executive search and we do not expect a sudden sharp uptick in business. But the potential for a reasonable increase from a relatively low base is real. As such, we are initiating coverage on the company with a Buy for patient investors who are happy with a solid dividend (5%+) and the potential for reasonable returns if the North American economy remains flat over the next two years and relatively strong returns if it grows beyond expectations.
One caution: Caldwell is a relatively illiquid stock and we do not recommend chasing it. Our current buy range is $1.00-$1.10. Use limit orders and be patient. The shares are also listed on the U.S. over-the-counter Grey Market but trade there so infrequently (the last was on Jan. 2) that we do not advise using that option.
Action now: Buy between $1 and $1.10. The stock closed on Friday at $1.04.
- end Ryan Irvine