Collector's Universe Business Quality Report (CLCT) - FREE SAMPLE
NOTE: This business quality report is being provided as a free sample to free subscribers of the type of analysis available exclusively for the paid membership.
Collectors Universe is a business focused on authentication and grading services primarily for coin and card collectors. This Collectors Universe Business Quality Report explains the quality ranking that CLCT received under my quality ranking system.
Basic Company Information
Company Name: Collectors Universe, Inc.
Ticker: CLCT
Quality Ranking: Generational (6)
Primary Reason: Customer Retention by historic dominance
Size: Small-Cap
Last Updated: 07/16/2020
Key Points:
Collectors Universe operates as the leader of a duopoly in the third-party grading space.
Third-party graders of collectibles benefit from network effects based on trust and history of consistent grading.
The nature of the collector’s industry is such that CLCT’s brands of PSA (cards) and PCGS (coins) will continue to have brand power so long as collectors hold previously graded items of value.
Collectors Universe Business Quality Description
Collectors Universe operates grading and authentication services for coin collectors and card collectors. Collectible cards include sports and non-sports cards like trading card games. Collectors Universe provides value to the marketplace as an independent third-party service that can certify the collector’s items in a non-biased manner. Without 3rd-party graders, the overall value of collectibles would be much lower.
In return for this valuable service, Collectors Universe takes a percentage cut on the value of the graded item. This cut is about 2% for coins and 9% for cards. Once verified, items are returned to owners in sealed packages with the seal and brand of PSA or PCGS. These sealed packages then display the brand whenever the collector’s items are sold in the future on eBay or in other auctions.
Market Leadership is key to the business model’s success
As the market share leader in both coin collecting and card collecting Collectors Universe is able to demand a premium for its services. However, that is not the important thing to understand.
Instead, it is important to understand how the product works after Collectors Universe has completed its grading service. Once complete, a sealed package is returned to the customer with the enclosed card or coin. That package has a rating and a unique identification number attached which can be traced back to a Collectors Universe database.
These collectors items are then kept, stored, and collected all within the PSA or PCGS provided sealed packaging. PSA stands for Professional Sports Authenticator and PCGS stands for Professional Coin Grading Service. These are Collectors Universe’s two main brands.
High-end Coin Collectors and High-end Card Collectors specifically seek to buy PCGS and PSA graded items
When you read an eBay listing for a collectors item, it will list both the quality grade and the name of the third-party grading company. For the buyer, this demonstrates proof of authenticity and quality. For the seller, they can rely on specific trusted brands for consistency of grading quality. For Collectors Universe, this process continuously reinforces brand loyalty.
PSA seals each collectible trading card in locked packaging. You can see the “PSA” brand prominently in the top center of the package’s label. The label shows the rating “9” out of 10 and identifies the card. This card was listed for a “buy now” price of $24,999.00 on eBay. If Collectors Universe received their customary 9%, their take would be about $2,250. Most likely, their take was lower than this because the item is likely overpriced.
Not only is the PSA logo prominently displayed in all online product images during sales, but the PSA brand name is often cited in product listings.
Both the name of the professional grading company AND the grade itself are therefore important to buyers of the collectible. Collectors don’t solely select on the grade #. The grading company PSA is specifically sought by some collectors.
The same qualities hold true in the coin space for Collectors Universe’s other key brand: PCGS.
The PCGS brand is prominently displayed in 3 different locations on the slab. Near the top right-hand corner of the label, in the center of the label with the top grade of “70” and in the bottom right-hand corner of the slab itself. As images are heavily used in the selling of collectibles, the PCGS brand is a key part of securing and marketing the value of coin collections.
The behavior of collectors (customers) creates a durable and sustainable moat
Think about what it means to collect an authentic graded coin or card. That collectors item will be kept safely sealed and high quality in the provided packaging. Each time a collector shows off their collection they will be proudly sharing the PSA and PCGS brands to anyone who looks.
Yet, the key is that collectors items are collected.
Collections are kept for long periods of time. We’re talking not just years but sometimes decades. During that time, collectors are unlikely to remove their collectibles from their sealed packaging for which they paid a considerable sum of money to have graded. That means collectors are incentivized to do two things:
Repeatedly purchase grading services from trusted and long-term brands.
Promote and support the brand to other collectors.
All of this is driven by the fact that the value of a collector’s collection is intricately linked to the brand power of the third-party grader. A collector needs the third-party grader to stay in business and stay reputable or else the value of their collection will decrease accordingly.
The brand power of Collectors Universe is built decades in advance
In summary, Collectors Universe builds and reinforces its brand every time it makes a sale. Each sale is a permanent advertisement of it’s brand and services.
When collectors list their cards and coins, they use the brand name PSA and PCGS in order to market their collection.
Each collectible authenticated and graded today, in 2020, will likely be kept by one collector or another for multiple decades. This means that the brand power of 2020 will carry forward through those decades as well. This doesn’t prevent brand deterioration, but it limits the ability of others to compete and steal business.
Collectors Universe has a form of float from its large backlog
I have yet to test the card or coin grading service but I likely will prior to buying stock if I end up choosing to invest. Either way, Collectors Universe makes quite clear on their PSA website that a significant backlog exists.
Small orders can expect grading to take 20 business days and large orders over 100 business days. That’s over 3 months of time where customers would send in order and payment and Collectors Universe gets to utilize that cash flow to fund operations if it so chose.
The combination of float from this backlog and the non-capital intensive nature of the business allows Collectors Universe to earn very high returns on capital. While not infinite, they are high enough to be meaningless in terms of capital retention needs in order to grow.
The result is that the cost of growth is nearly zero and the company is not limited by capital constraints in order to grow. Instead, the company’s growth is limited only by the growth in the collectibles market and finding suitable grading experts as employees. As market leader they can’t outgrow the market.
Why Collectors Universe doesn’t deserve a lower quality rating
The next lowest quality rating is an “excellent-quality” business. The key differentiator between an excellent business and a generational business is the long-term durability of the owner’s earnings.
Collectors Universe doesn’t have to compete on price because its brand power is built on network effects where both buyers and sellers use their brand to market the product and identify high quality. This is a self-reinforcing loop. In addition, the unique nature of a collectibles marketplace is that collectors keep products for long periods of time.
Collectors Universe is likely to be around and still operating strong decades from now precisely because their customers will keep their graded products for a long period of time. If a customer depends on the brand power of PSA or PCGS today, they are likely to depend on it in the future as well. The company, buyers, and sellers, all depend on the ongoing strength of Collectors Universe and its brand power.
Why Collectors Universe doesn’t deserve a higher quality rating
Generational Quality business is the highest rating in my quality ranking system.
References:
Mid Story Ventures Diligence Report [private distribution]
Alta Fox Open Letter to Shareholders of Collectors Universe dated June 18th, 2020
Personal experience collecting coins and trading cards
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NOTE: This business quality report is being provided as a free sample to free subscribers of the type of analysis available exclusively for the paid membership.
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