NASDAQ:EPAX Ambassadors Group

Ambassadors Group is an interesting company I’ve come across as an example of a competitive advantage and intangible barriers to entry that have failed to defend it from external forces and severe difficulties in its business. It could present an interesting investment opportunity in the future.

Ambassadors Group organises educational travel programmes for young people in the US to overseas destinations to develop global cultural intelligence. In its prime it had operating margins of 44% and returns on equity of over 30%.

Competitive Advantage

“Our customer satisfaction is high as evidenced by our top-quality Net Promoter scores which we believe underline the value of the travel experiences we offer. We have developed solid relationships with our worldwide partners and suppliers, and continue to grow strategic alliances with organizations that closely align to our education-based corporate mission.”

These alliances can even be contacts with government officials who meet with their customers, which give students a great insight into foreign policy.

“Because we provide students, as young as 10 years old, a two to three week international travel experience, a high degree of parental trust in our brand and our ability to deliver our programs safely is required.”

They have a 50 year track record and are associated with ‘People to People’, a non-profit organisation dedicated to the promotion of world peace. It’s hard for a new competitor to enter this market and gain the trust of teachers and parents.

But they do compete with teachers organising their own trips and existing educational travel activities like summer camps. Their premium offering needs to be clearly distinguished and have identifiable benefits from these other options.

Performance from 2010

Of course even good companies are not immune to general economic conditions. Over the last few years their revenue and earnings have deteriorated. I looked back at the 2010 annual report when things first started to go wrong to see what management had to say. I found their review of the year to be quite laughable to be honest. Here is an excerpt from the review, remember this is a year in which revenue declined 23% and earnings declined 63%!

“Although 2010 financial performance was substandard, we are pleased to be experiencing growth, although modest, and will be working to build upon the momentum we have started.

Some of our 2010 highlights include the following:
– Ended year with $8.1 million in net income, or $0.42 diluted earnings per share in a challenging economic environment.
– 2010 gross margin held strong at 40.8 percent on gross revenue of $162.0 million compared to 41.1 percent on gross revenue of $203.7 million in 2009.
– Operating expenses for 2010 up $2.4 million to $56.0 million from $53.6 million in 2009 as the Company drives revenue generating activities and positions for economic recovery.”

It goes on like this. The management barely even acknowledges the decline in sales and completely focuses on the “positives”. Such complacency in the face of a rapidly declining business should have set alarm bells ringing for shareholders.

In the next couple of years revenue has continued to decline and profits are now non-existant as gross profits have fallen to a level at which operating costs are barely covered. Their marketing is far less effective and their administrative expenses have not been controlled well enough.

Present day

And so to the present day, and the management and board has been overhauled. The CEO ‘resigned’ along with the COO and chairman. The new board comprises of substantial shareholders in the company which is a good sign. One concern however is that some of their crucial customer relationships could be affected. The effectiveness of marketing also seems to be declining.

The year ahead does not appear to be showing any signs of recovery:

“As we have concluded our fall and winter marketing campaigns, we anticipate a reduced level of travelers for 2013 compared to 2012 driven by a continued decline in Student Ambassador Programs enrollments due to a faster than expected decline in the performance of the stand-alone mail component of our integrated marketing strategy.”

It appears as though sales will continue to deteriorate and could push the entire business into a loss (it currently only breaks even due to advertisting profits from a website it owns). The current board has been aggresively returning cash to shareholders. This makes me weary. The business is obviously still in decline and could do with reserves to cover any future losses. However they are releasing shareholder value.

My Conclusion

For now this business is too uncertain for me to invest in but it does highlight a useful example in my opinion, of a company that had a competitive advantage and enjoyed strong margins and returns on equity, but that saw a rapid decline in its market and is now struggling. I will add it to my watchlist however as I’ll be interested to see how it does in the future.

Disclosure: No position

Founder of Investing Sidekick. Works as a research analyst and is an avid value investor, always searching for undervalued shares.

Leave a Reply

Your email address will not be published. Required fields are marked *