Description

Introduction

Caldwell Partners is an attractively valued, high dividend yielding, small cap Canadian executive search firm with net cash on the balance sheet. It trades at 11x 2017 earnings and 16.5x five-year average earnings. Both multiples are adjusted for excess cash.

Caldwell has a market cap of $26 million and has a dividend yield of over 6%. This idea is meant mainly for smaller accounts.

Corporate Description

The Caldwell Partners International Inc., provides human-capital services to its clients through its offices in Vancouver, San Francisco, Los Angeles, Dallas, Calgary, Toronto, Montreal, and New York City, and its partners in Chicago. The Caldwell Partners focuses, in particular, on recruiting “C-class” executives (chief executive, chief financial, chief information officers, as well as other senior executives). 

Industry Outlook

Low to modest growth is expected in the traditional executive search industry over the next five years. Firms, including Caldwell, are expanding into services other than traditional executive search, such as succession planning, and diversity and inclusion consulting in order to grow.

Revenue

Caldwell Partners focuses on providing excellent customer service and high-quality work. They generate almost all their revenue from professional fees. While the number of partners has stayed roughly the same over the last five years (it has only increased from 33 to 38), the revenue per partner has doubled over the same period as the number of assignments per partner has increased.

Balance Sheet

Caldwell has a solid balance sheet with $16 million in cash and marketable securities, $10 million in accounts receivable, offset by $20 million in compensation payable. In other words, Caldwell has surplus working capital of approximately $5 million.

Valuation

P/E Multiple

The executive search industry is a cyclical business, so the 5-year average EPS was used as a starting point to determine a value. Over the last five years, the earnings per share has varied from $ -0.01 to $ 0.10. Over the same period of time, the revenue has doubled.

All multiples are based on the current share price of $1.29.

5-year average EPS: $0.0634

5-year average P/E multiple: 20

If 2017 earnings are looked at, the P/E multiple is as follows:

2017 EPS – $0.096

2017 P/E – 12

Both of the above P/E calculations have not been adjusted for any excess cash in the business, which can be estimated as $5 million (approximately $0.24/share), based on current working capital numbers.

Adjusted for the cash position:

5-year average P/E multiple (adjusted for cash): 16.4x

2017 P/E – 10.8x

The P/E also hasn’t been adjusted for any improvements in 2018 EPS (through the first three quarters of fiscal 2018, EPS has been $0.082, meaning that full-year earnings could be $0.109/share). In order to be conservative, this analysis excludes this potential upside.

Caldwell is a stable/low-growth company and the five-year average EPS is probably an accurate indicator of their average EPS going forward.

With the ability to dip into their cash stockpiles during bad years (due to their excess cash position), Caldwell can pay its dividend even in tough years.

To the extent that it earns more than the dividend, Caldwell can look to expand via acquisitions, or repurchase shares.

Comparable Companies

It’s difficult to find comparable Canadian small-cap companies in the industry. Larger companies, such as Korn Ferry, trade at a 1-year trailing P/E of 28, much higher than the five-year average P/E of Caldwell.

Potential Takeout Multiples

Historical acquisition multiples for small size executive search firms have ranged from 0.7 times to 0.9 times sales. With respect to Caldwell, there would be potentially 50% upside in a takeout scenario.

Large Shareholders

CEO – 20%

Ewing Morris – 10%

Ewing Morris is a well-respected Canadian value investment management firm.

Risks

- Companies refine their use of technology, such as LinkedIn, to recruit executives leading to declining use of executive search firms

- Caldwell spends their cash stockpile on an acquisition/initiative that doesn’t work out

Conclusion

In summary, an investor earns 6.2% per year via the dividend and best case, the company is able to sustain its current earnings level over the next 5 years resulting in a return of approximately 9% per annum (including the 6% dividend yield), assuming stability in the P/E multiple.

Catalyst

Nothing imminent, just an attractively valued security