However, to philatelists (stamp collectors), stamps are tiny works of art to be collected and treasured. What's more, stamp-collecting is far from being a peculiarly British obsession. There are estimated to be 30 million stamp collectors in China alone.
Googling 'stamps' or 'stamps collecting' brings up the Stanley Gibbons (LSE: SGI) website as the number-one entry. The iconic British firm, which dates back to 1856, has dominated this market since it became the world's first stamp dealer.
In recent years, Stanley Gibbons has expanded into other collectibles, such as autographs, rare records and other memorabilia. As well as acting as a dealer and auctioneer, Stanley Gibbons has thriving mail-order and online retail outlets, as well as publishing several price indices for rare stamps.
Licking the market
Stanley Gibbons -- which is incorporated in Jersey -- became a public company over 10 years ago, joining the junior Alternative Investment Market (AIM) in September 2000. The past decade has been a very good one for both the company and its shareholders.
In the eight years from 2001 to 2009, Stanley Gibbons saw its pre-tax profit leap tenfold to more than £4 million. Over this period, its earnings per share (EPS) increased at an even steeper rate, rising from under 1.3p to 14.7p at the end of 2009. This substantial growth made the firm an oft-discussed candidate on our Growth At A Reasonable Price (GARP) discussion board.
What's more, the firm's shares have outperformed the wider stock market by a huge margin. From their float price of 18p, they soared to peak above 250p in June 2007.
However, Stanley Gibbons couldn't escape the credit crunch and economic downturn. After six years of double-digit earnings growth, the stamp dealer suffered its first setback since becoming a PLC. In 2008, profits dropped 18% and earnings slid 2%.
During the market meltdown, its shares dived to 80p in January 2009. This turned out to be a great time to buy, as today Stanley Gibbons shares are up 3.5% at 178p -- more than double their 2009 low.
Investing in stamps
Stanley Gibbons' success has come from positioning stamps as 'alternative investments,' placing them in the same category as art, antiques, coins, fine wines and vintage vehicles.
According to the dealer's GB30 Rarities Index, launched in 2004 and backdated to 1998, sought-after stamps have massively outperformed shares. In the 12 years to the end of 2010, this index shot up 275%, which equates to compound growth of 11.6% a year. Within this index, the value of individual stamps has risen between 131% and 540% since 1998.
In comparison, the blue-chip FTSE 100 index is below 6,000 today, almost exactly where it stood 12 years ago. Hence, Stanley Gibbons argues that stamp prices are largely uncorrelated with shares, property and other assets and, therefore, add diversification to portfolios.
How did 2010 turn out?
Stanley Gibbons makes nearly two-thirds of profits made in the second half of the calendar year, so its shareholders will be keen to find out how things turned out in July to December.
According to today's trading update, business has been brisk, with turnover ahead of market expectations and profits broadly in line with forecasts. This comes despite substantial investment in its websites, IT systems and marketing campaigns.
Likewise, cash generation was strong, helping to fund two earnings-enhancing acquisitions (M & N Haworth and the Benham Group) and the refurbishment of the flagship London store at 399 Strand (to be completed by April). Also, website and database improvements will be rolled out in the first quarter of 2011, aimed at bringing in more customers.
As for 2011, a strong order book from investment clients is expected to lead to higher profits, plus the group expects to benefit from increased sales activity and publicity surrounding the Royal Wedding on 29 April.
In the words of the chairman:
"Future growth in revenues and profits are anticipated... the Group's businesses are in a stronger position...than at any time in recent years."
The stamp of value?
Given the above statement, Stanley Gibbons seems sure to meet analysts' forecast of pre-tax profits of £4.5 million and EPS of 15.6p. This puts its shares on a price-earnings ratio (PER) of 10.4, and the anticipated dividend of 5.45p gives a dividend yield of 3.1%. (It's worth noting that the firm's EPS is flattered by Jersey's generous tax regime.)
However, one sign of a healthy, growing business is weaker than I'd prefer: cash generation is running at only half of pre-tax profits. Also, the group's cash pile declined from over £3 million at the end of 2009 to £1.8 million by June 2010, largely due to £1.3 million spent on new stock.
Clearly, Stanley Gibbons is an entrepreneurial little business making the most of a highly niche market. However, its shares are a bit too pricey for me, as they trade on a PER above 10. This isn't cheap for a micro-cap (sub-£50 million) AIM company competing with the likes of online auctioneer eBay.
One that got away
That said, I spotted the value in Stanley Gibbons during the market slump which ended in March 2003. I owned the shares for about four months, buying at 25p and selling at 40p for a quick 60% profit. Had I held onto them, they would have gone on to breach 250p by mid-2007.
In other words, had I had the patience to wait four years, Stanley Gibbons would have been a 10-bagger. Yet another mega-return that got away!
Source: http://www.fool.co.uk/news/investing/company-comment/2011/01/18/the-stamp-of-approval.aspx
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