PSA Likely to be Sold...Then Out of Business? - Part 2

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Posted By: Eric B

A couple months a go I started a thread giving my opinion about the future viability of PSA in conjunction with its parent company Collectors Universe (NASDAQ: CLCT). Most of that thread was off-topic, so Ill provide an update here and include another prediction. These are opinions only!

Earlier this month, CLCT issued its 2nd Quarter results (they are on a June fiscal year) for December 2008. They were not good. Several items stick out.

First, cash used during the quarter was over $3 million. At that rate they will run out within 2 years. And this occurred during a period where they were reducing expenses in order to conserve cash. They had already suspended dividends. While a correct move, it is one of the first signs that a company is in trouble. How many companies have eliminated dividends and not gone bankrupt? Im sure it happens, but it is infrequent. They also converted notes to cash. Again, good move, but they have run out of these easy transfers. Income loss for the quarter was $10 million. Ignoring impairment, it was still a loss of $2 million.

Second, they set up a full valuation allowance to their Deferred Tax Assets. That is really bad it is an admission that the company will more likely than not fail to make a profit in the near future (3-5 years) to use the deferred tax assets. These are Accounting terms, not mine.

Quick explanation of what this means via an example. Company makes $5 million. Taxes are $2 million which they pay. Therefore profit is $3 million. Next year, company loses $10 million. Taxes are negative $4 million. They dont get this back but rather record this $4 million as a Deferred Tax Asset to use later (technically they can apply to prior year, but ignore this since CLCT has already done this). Third year, company makes $15 million. Taxes are $6 million. They only need to pay $2 million since they can use the $4 million Deferred Tax Asset from the prior year.

So when a company sets up a full valuation allowance, they are saying that they will more likely than not fail to make a profit in future periods to utilize the Deferred Tax Asset. This is a sign that a company is going under.

So how does this affect PSA? Results for the quarter for the PSA division were down. Operating income was just $258K. This is before the Presidents salary, Accountants, sales staff, office rent, etc. If you apply these total CLCT overheads based on revenue, total income for PSA is negative, i.e. they are not profitable. PSA units sold were down 8% from the prior quarter and lower than last year. Presumably these cards were submitted in the August-October timeframe before the economic mess started gaining visibility. So results may be much worse next quarter. If interested, read the latest 10Q for CLCT on www.sec.gov.

The grading business model has the law of diminishing returns. When a card is graded, it doesnt need to be graded again. Yes, some of you resubmit, so lets say that when 100 cards are graded, 80 do not need to be graded again. So the population is constantly decreasing. Constant growth was always unsustainable. Plus the outside forces of fake holders, lack of grading integrity, scams, etc. are hurting the industry and will get worse, not better. The half-point scale was initiated based on need and is losing traction.

So I feel a sale of PSA is inevitable. CLCT already sold off the Currency Division, so anythings possible. Plus the owners are coin people that would be the last to go. I mentioned last time that a sale would cause PSAs demise within 5 years since they would get sold to a company that would squeeze revenue out for a short time before credibility is lost and the company cannot make any more profits. But thats assuming the company could be sold. Hard to sell if they are losing money.

So heres a new prediction the PSA SET REGISTRY WILL CEASE TO EXIST within 2 years. Why? Because its not making PSA much incremental revenue. Yes, a 1-of-1 PSA 8 T206 generates buzz and brings high sales. But PSA earned just $100 or so from the grading, same as a similar PSA 6. They dont all get resubmitted. But more importantly, the cost to transfer and setup the Set Registry Hardware and Software along with its maintenance makes a sale more prohibitive. A buyer would ignore that piece. Sticking with the population report held on an Access database would be much cheaper.

Im not anti-grading. But I feel the SGC model without the inefficiencies and costs of being a public company is the business model for long-term success. Beckett too. I would rather stick with them than the alternative. Think VHS vs. Betamax. Even then, eventually you transfer to DVDs.

Could these predictions fail to occur? Absolutely. The stock price has seen a slight resurgence recently. This signals to me that someone may make a play for the company. But they also instilled certain poison-pills to keep this from happening. So maybe the stock price is based on a sum of the parts and remaining cash. Regardless, the rate at which they are losing cash and the certain slowing of the economy will require them to do something. Layoffs?

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Posted By: Adam

"PSA SET REGISTRY WILL CEASE TO EXIST within 2 years. Why? Because its not making PSA much incremental revenue."

Doesn't it keep people loyal to using PSA?

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Posted By: Brian

"PSA SET REGISTRY WILL CEASE TO EXIST within 2 years. Why? Because its not making PSA much incremental revenue."

Keeping a website online is inexpensive. Regardless of the owner, taking down the website wouldn't yield any material cost savings. Its the least of their worry...

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Posted By: Eric B

Adam, very good point. I failed to consider that. I may need to re-evaluate that position, at least the 2 year part. But I'll keep the post as is and not edit.

But the software wasn't cheap. It cost over $4 million but presumably included coins too.

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Posted By: David

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Posted By: Bruce Perry

PSA was a private company prior to about 2001 and doing very well, when Mike Baker, Steve Rocchi and company left to form GAI, at least partly due in fact to PSA going
"public" and the changes that ensued because of that decision...In my opinion, although grading had continued to grow until the economic downturn of the past 12-18 months, PSA was never quite the same after going public (or relatively soon thereafter), and because of the departure of a few of the key, leading people who started with, or were soon to be with, PSA in 1991...again this is just my opinion....finally this business needs more than one reputable grading company, so lets hope PSA can thrive, as they are, or under new management

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Posted By: Jason L

one takeaway from this thought process is a potentially HUGE positive.
PSA is sold and taken private, where we have demonstrated examples of very successful business models. in other words, I hope they get sold into private, capable hands, and become better than ever.

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Posted By: Dan Bretta

I don't see the registry dying at all. The whales who like to compete on that thing will not let it go away.

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Posted By: Alan

I just hope they will still have the PSA luncheon at the National.

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Posted By: Tom Boblitt

I'm not a participant in the registry, I don't see that as something that'd result from a PSA sale. I agree with the sentiment that the registry is probably not THAT expensive to keep afloat and is obviously a huge tool to keep people loyal to their service.

Whether you like grading or not........we'd all better hope that they survive and grow their business.....for a number of reasons.

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Posted By: Joe D.

c'mon..... even if they are on the brink of going out....

PSA is a very, very, very powerful brand name.
The registry and the PSA name will not go away unless all grading and all grading companies go away.

Any competitor or any newcomer would salivate at the chance to pick up that brand name and that registry.

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Posted By: Eric B

More powerful name than Merrill Lynch? MCI? Circuit City?

You don't make a profit, you don't exist for long.

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Posted By: Joe D.

as far as I know the name Merrill Lynch is still going.

MCI and Circuit City???.....
Absolutely YES - without even the slightest bit of doubt PSA is a more powerful brand name in its field than those two were in their fields.

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Posted By: barrysloate

More powerful than Chuck E. Cheese?

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Posted By: Dan Bretta

The registry will never disappear and someone will buy the PSA brand. It's not like GAI going out of business where people will just crack the holders and send the cards off elsewhere...the registry makes PSA much more valuable to those that use the service.

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Posted By: Marty Ogelvie

Barry,

I have nightmares about Chuck e Cheese! The absolute worst Pizza on the planet and yet they are packed on Fridays and Saturdays.

With 4 year old twins, my NO MORE Chuck e Cheese days are no where in sight! alas!

marty

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Posted By: barrysloate

Marty- I went once with my nephews and never recovered...it's become my metaphor for the Apocalypse!

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Posted By: Dan Bretta

I must be weird because I actually like Chuck E. Cheese pizza. My kid is having his birthday party there in two weeks...we scheduled for a weekday though so it won't be so crazy.

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Posted By: barrysloate

Dan- it's just a little too quiet for me...I like to BRING THE NOISE.

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Posted By: Anthony S.

Dan,

The difference is that in NYC the mascot that parades around the Chuck E. Cheese restaurant is an actual Norwegian Wharf Rat.

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Posted By: Bruce Perry

Barry Sloate, one thing in life I cannot fathom, is your presence at a CHUCK E.CHEESE....I went there too with our son for more than one birthday party....a memory too horrible to revisit in any detail...not my son's birthday celebration per se, but the C.E.C. establistment...and the worse Pizza of all time...hands down

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Posted By: barrysloate

Hi Bruce- hope you are well. Yes, I couldn't fathom it either. My brother took me there when his kids were still quite young, and I never went back again. Once was more than enough for me. It was so noisy.

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Posted By: Mark Lutz

I took my son to a Chuck E Cheese in Nevada 2 years ago and was both shocked and appreciative to find out that they sold both wine and beer (to adults only).

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Posted By: marshall barkman

Barry....there is this new mod pizza shop opening up just blocks from you. It is called BORING. Inside you will find a bunch of old blue hairs sitting around with old geezers with headphones listening to tranquil sea sounds while eating pizza. The waitresss does not speak, instead she writes everything out and then places paper on the table. There is a private table in the back for the Zen Buddhist monk where the waitress is not allowed because the mere presence of her would break the mood. Chuck E Cheese is the best and let the kids raise hell and BRING THE NOISE because that is what kids do.

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Posted By: barrysloate

But I'm not a kid...I'm older. Get it?

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Posted By: marshall barkman

I know you are old Barry but you had to know when going to Chuck E Cheese that it would be out of control and wild. While in Nashville i took the neighborhood kids there and it was total chaos. The skeeballs were everywhere and a video game got destroyed. My bill was over 1000 dollars because of the destroyed game but i just loved it because it just makes my day to see kids cutting loose and raising hell. I will admit that i played a part in the hell raising which made things worse. I understand we need scientists and Bill Gates types but we also need Musicians and middle linebackers.

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Posted By: Mark T

And they will remember it for the rest of their lives.....Priceless

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Posted By: barrysloate

Marshall- the funny thing is I had no idea what Chuck was all about. I just went there with my brother expecting to grab some food. It was only when I went in that it got REALLY NOISY. Not a big deal...and I ate the pizza.

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Posted By: marshall barkman

Now that had to be a trip. The onslaught of Chuck E Cheese can be frightening if one does not expect it.

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Posted By: barrysloate

I hid under the table most of the night.

By the way that Bill Gates character is not as quiet as you think...I heard he can down a pitcher of beer in twelve seconds, followed by a whiskey chaser. I think he hangs out at Hooters alot.

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Posted By: marshall barkman

LMAO.....when i took the kids there and things got out of control the manager was pissed. He started with this scolding tone and i said if you want out of control put on a old Sex Pistols concert tape because this is mild. I told him to relax and no matter what happened i had the bill covered. I mean those kids went haywire and the noise was deafening.

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Posted By: marshall barkman

He has been known in his younger days to enjoy the finest of herb also. Can you say Silver Haze?

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Posted By: Steve Murray

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Posted By: barrysloate

I think we hijacked Eric B's thread. I apologize for that.

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Posted By: mark s.

personally, gentlemen, i'm flabbergasted!

i thought EVERYONE knew that chuck e cheese "pizza" was actually a PICTURE of some grated cheese, on a CARDBOARD disk, and subsequently MICROWAVED...

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Posted By: Eric B

Hijacked? Hardly noticed. I enjoy taking my kids to CEC's, and like their Chicken pizza.

But I am really amazed at how far removed many folks are from the business aspect of their hobby. To think someone will buy and continue running a company with no profits is denial. But I'll just make this post every quarter as we get closer and closer to the end. I would be interest in what the Bruce's think.

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Posted By: Doug

I loved going to Chuck E. Cheese as a kid, but I heard they don't have that giant plastic ball pit anymore. At least they have beer if I ever have to go there at my old age of 28...

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Posted By: Paul

Barry, its cheesy to hijack a thread like that

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Posted By: barrysloate

Paul, that was brutal...but it's my kind of humor.

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Posted By: JimCrandell

I think if there is one thing we have learned from the financial crisis is that once you lose the confidence of your customers its over. You can still be liquid and solvent but if the customers are nervous about your viability they will probably steer their trades to the other guy.

Same concept here. If Eric B wants PSA to go out of business or to be sold its posts like this that will help accomplish it. Not saying he shouldn't post stuff like this but its obvious that the net effect of this will be that readers of Network 54 are going to be less willing to submit their cards to PSA in fear that their could be a financial "event" which will cause them a delay in getting their cards back.

Similar case with Mastro Auctions. No question the posts on Mastro Auctions has made collectors/dealers less likely to consign their cards to them perhaps hastening their demise.

I am submitting another 500 for review and another 500 raw to PSA.

Jim

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Posted By: barrysloate

Jim- on the outside chance PSA does go out of business, and I consider that remote, do you think collectors will look to cross their cards over to one of the surviving grading companies? Also, do you think it will hurt the value of PSA graded cards?

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Posted By: Tom Boblitt

Eric specifically wants them to go out of business. I think he's just pointing out the difficulties that they are going through.

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Posted By: boxingcardman

"No question the posts on Mastro Auctions has made collectors/dealers less likely to consign their cards to them perhaps hastening their demise."

There have been many Mastro slam-fests before on N54; none have caused any real damage. This one might be different because the facts recited in it call into question the most important part of the consignment: getting paid. Mastro defaulting temporarily on its payment obligations to its consignors has made potential consignors less willing to send their cards into them.

As for PSA going down, mixed feelings there. Like the entire GOP going over a cliff in my new sportscar.

Sic Gorgiamus Allos Subjectatos Nunc

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Posted By: barrysloate

Adam- if you can make that happen, I'll buy you a new sportscar.

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Posted By: JimCrandell

Tom,

No doubt and I was not accusing him of such--I was simply stating that his post and related commentary will have the affect of making people less likely to submit to PSA thus hurting their chances for survival in their current form.

Barry,

No and no. I think the PSA brand will be picked up if something bad happens and if that is true collectors will stick with PSA.

Jim

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Posted By: Steve

Who cares if PSA goes down? The cards still are cards.

I mean they don't all of a sudden become worthless.

I wonder exactly what motive this OP has?

The thread was more informative regarding Pizza.

Steve

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Posted By: Jason L

drive down the price of a private acquisition so he can snap them up hisself

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Posted By: Rich Klein

Thus:

He is crunching the #'s and forming an opinion like many analysts do. Nothing more; nothing less.

I guarantee you that there are other market analysts who write about PSA's home company and say both positive and negative things. We might look at the same set of #'s and come up with different conclusions. I'm sure Jim C and Bruce can look at the whole sheet and tell you either positives or negatives. There are pros and cons to being public -- and the opening post is one of the drawbacks to being public.

And when OIL was in the process of sliding down from the high of nearly $150 per barrel to where we are today -- I remember a bunch of analysts on CNBC avowing that $110 was the lowest oil could go. Needless to say; hopefully in their case; they did not have too much invested in Oil.


Regards
Rich

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Posted By: David M

I hadn't really thought about what Jim Crandell mentioned. What would happen if you had submitted a bunch of cards to PSA and then they shut down? I guess it's like the Mastro discussion. Since I have some cards I was thinking of submitting, this type of talk would cause me to take a "wait and see" approach to submitting any cards. So this also confirms the other point Jim made about the affect such comments can have on a business.

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Posted By: Red

And what would happen if a meteorite fell from the sky onto New Jersey and took out the FedEx truck carrying Jim's cards back from PSA, SGC with your cards about to ship, and Robert Edward Auctions after they cashed checks from their latest winnings but didn't ship yet or pay their consignors. We really need to analyze every possible disaster that could affect your cards and have these issues addressed in contracts and auction terms fine print. 65 million years ago the message boards would have declared "PSA likely to be struck by meteorite...then out of business?