Description

The company organizes and promotes educational travel programs for students, athletes, and professionals under the People to People brand. EPAX was a spin-off of Ambassadors International(written up on VIC last year); the spin-off occurred on February 28, 2002 based on a tax free ruling. The company offers three programs: the Student Ambassadors Program, the Sports Ambassadors Program, and the Professional Ambassadors Program.

The Student Ambassadors Program provides an opportunity for students to travel domestically and/or internationally to learn about the history, government, economy and culture of the places visited. These trips take place during the summer months and usually last approximately three weeks. The Sports Ambassadors Program provides an opportunity for athletic students to explore the host country’s culture and to participate in international tournaments with teams from around the world. The Professional Ambassadors Program arranges trips for professionals with common interests to travel abroad to meet and exchange ideas with foreign professionals with similar backgrounds. EPAX markets all three of these programs through a combination of direct mail and local informational meetings.

Valuation
Currently EPAX trades at $15.30 per share and has no debt. Net cash is $.81 per share. In 2001 EPAX generated $1.42 in EPS and 19.5mm in EBIT (before an amortization charge and a one time charge). In 2002, due to 9/11 and the weak economy, there are only 20,000 participants enrolled in the various travel programs versus 2001 when there were 26,000 enrolled (25,800 traveled). In 2002 cancellation rates are higher than normal. Nevertheless, assuming 18,500 people travel(conservative number), EPAX will have EPS of approximately $.87 and EBIT of approximately 12.2mm. Assuming that in 2003 EPAX can travel 25,000 people (25,800 in 2001) EPAX will generate $1.36 in EPS and 19.2mm in EBIT. At $15.30 a share, the stock trades for 11.3x 2003 EPS and 7.4x 2003 EBIT. In 2002 which will be a trough year, the company trades at 17.6x EPS and 11.7x EBIT.

People to People
EPAX has the exclusive right to develop and conduct programs for kindergarten through college age students using the People to People brand. EPAX retains these exclusive rights with People to People through 2010 and can, at its option, extend them through 2020. Through its exclusive relationship with People to People, EPAX has direct access to foreign institutions and officials, including among others, the British Parliament.

Background on People to People International: People to People is a private, non-profit organization dedicated to the promotion of world peace through cultural exchange. Founded by Dwight D. Eisenhower in 1956, the program was originally administered by the U.S. State Department. Eight U.S. Presidents have served as Honorary Chairmen of People to People, including President George W. Bush, who currently holds that position.

Competition
EPAX competes with independent trips organized by local teachers and with travel companies which provide similar educational experiences. There are no direct public competitors for EPAX. Companies that offer similar educational trips are the Cultural Heritage Alliance (CHA) and the Educational Forum (EF). CHA organizes educational trips for teachers and EF offers modestly priced educational trips directly to students. Both are private, for profit companies that were founded in the 1960s. The Educational Forum expects enrollment to be down by quite a bit this year, but anticipates a record year in 2003 assuming the global climate permits safe travel. Recently, many of CHA’s trips were canceled by school boards but 2003 enrollment is on target to be a very strong year. Both companies said there are several people that have postponed their 2002 traveling plans to 2003.

Risks
Obviously, EPAX faces a tremendous risk in that another large terrorist attack may occur, resulting in cancellations and declining enrollment. There are already serious concerns about safety and travel conditions among students and parents. Another terrorist attack, or a war, would have a major impact on EPAX’s business, however, I believe this risk is alreadly priced in the stock.

Conclusion
EPAX is a highly profitable, debt free company that is in a unique position as a result of its exclusive arrangement with People to People. The operating margins (revenue is after trip expenses) have been above 34% the last three years and were 45% in 2001. The company has a negative working capital since it gets paid in advance for the trips. Management indicates that organic revenue growth will be in excess of 15% per year and 20% in net income. The company’s ROIC is over 100% and the business can grow with minimal capital requirements. Management responded well after September 11; they reduced the work force by almost 30% and enacted a pay reduction for senior management.

Ambassadors Group
1996 1997 1998 1999 2000 2001 2002E 2003E
Gross program receipts
52,400 60,245 67,448 71,555 107,813 116,299 83,398 112,700

Revenue (after direct costs for trips)
17,635 21,304 24,429 26,533 40,322 43,414 30,440 41,699

Operating expenses
Selling and tour promotion
8,020 7,700 8,714 11,358 17,177 15,253 12,176 14,178

General & administrative
4,774 4,771 5,300 5,957 7,816 8,670 6,088 8,340

Operating Income
4,841 8,833 10,415 9,218 15,329 19,491 12,176 19,182

Income before Income Tax
NA 8,723 11,082 10,033 16,872 21,645 12,976 20,382

Taxes
1,276 3,090 2,945 3,332 5,816 7,682 4,477 7,032

Net Income After Taxes
3,565 5,633 8,137 6,701 11,056 13,963 8,499 13,350

EPS 0.36 0.57 0.83 0.68 1.13 1.42 0.87 1.36

Fully diluted shares outstanding
9,813 9,813 9,813 9,813 9,813 9,813 9,813 9,813

Participants
14,377 14,000 15,000 17,150 25,300 25,800 18,500 25,000
Gross PR/ Participants
3,645 4,303 4,497 4,172 4,261 4,508 4,508 4,508

Revenue/Gross program receipts
33.7% 35.4% 36.2% 37.1% 37.4% 37.3% 36.5% 37.0%
Selling and tour, % of revenue
45.5% 36.1% 35.7% 42.8% 42.6% 35.1% 40.0% 34.0%
G & A, % of revenue
27.1% 22.4% 21.7% 22.5% 19.4% 20.0% 20.0% 20.0%
EBIT Margin
27.5% 41.5% 42.6% 34.7% 38.0% 44.9% 40.0% 46.0%
Tax Rate
NA 35.4% 26.6% 33.2% 34.5% 35.5% 34.5% 34.5%
Net Income Margin
20.2% 26.4% 33.3% 25.3% 27.4% 32.2% 27.9% 32.0%


5 Year Compounded Growth Rates
Revenue Participants EBIT EPS
19.7% 12.4% 32.1% 31.4%

Catalyst

The market has very low expectations for EPAX. EPAX's competitors said that they are on track to have very strong years in 2003. I believe that business has recovered quicker than management and wall street have presumed and once this is clear to wall street the stock should perform well. The stock has been under pressure since September 11, but at this valuation it offers an opportunity to buy a highly profitable company at a compelling price. I believe this company should trade at least 15x a normalized EPS. I believe 2003 will be a somewhat normal year with a considerable recovery thus generating $1.36 in EPS which implies a share price of at least $20.