Ambassadors Group (AG) (EPAX) is a leading provider of education travel. At a market cap of $65 million, the street is valuing the travel business at about $30 million. That may not seem too cheap given the level of business they are doing today and the fact that they are just about breakeven. But the company is now all hands on deck to right the ship. We are initiating AG with a $10 target price as detailed further ahead in this series.
Ambassadors Group (AG) is a leading provider of education travel. The company was founded in 1967. It originally operated as Ambassadors Education Group, a wholly owned subsidiary of Ambassadors International, Inc, until 2/02, at which time Ambassadors Group was spun off through a stock dividend to International’s shareholders. It then started trading under the ticker EPAX.
The company has two reporting segments:
- Ambassador Programs: this provides educational travel services through multiple itineraries within 4 travel program types.
- BookRags – a website that is a source of online book summaries, critical essays, study guides, lesson plans and film summaries.
AG has traveled people for 50 years and has over 500,000 alumni. They offer both domestic U.S. as well as international destinations including Europe, Australia, China, Japan, South Africa, India, Costa Rica, and Antarctica. The programs operate using the People to People brand, which has strong brand awareness in the student travel industry. People to People is a private, non-profit organization dedicated to the promotion of world peace through cultural exchange. It was founded by President Eisenhower in 1956. AG licenses from their name and the exclusive right to develop and conduct programs for grade school through high school students. This agreement expires in 2020 with the potential to renew.
The company has numerous programs:
- Student Ambassador Programs: This is AG’s flagship program, and travels over 80% of their delegates. This provides educational opportunities for students aged 11 – 17 to travel overseas to learn about history, government, economy and culture. They market these programs through a combination of direct mail, social media, digital lead generation, and local in-person informational meetings. Delegates travel for 14 – 23 days during the summer. Each delegation consists of 30 – 40 students and several teachers, and is accompanied by local guides in each country. AG contracts with local program coordinators to run the day to day program.
- Leadership Programs: AG provides domestic travel experiences (primarily to DC, NY Boston, CA) to U.S. and foreign students (from over 50 countries). These are 5 – 10 day programs throughout the year. AG directly operates all aspects of these domestic programs.
- Citizen Ambassador Programs: These programs provide adult professionals with common interests (i.e., nurses), the opportunity to travel abroad to exchange ideas with foreign citizens who have similar backgrounds.
- Discovery Student Adventures: AG started this program in ’09 as a teacher recruited student travel program. They have an exclusive license from Discovery Education. These trips are focused on international adventure and scientific exploration. Trips are 7 – 16 days long and take place in spring and summer. AG recently decided to close the Discovery Operations as it has not proved financially viable.
The company also has a small internet division.
BookRags: This was acquired in 2008 and claims to be the largest selection of book summaries online. The site attracts student and teachers to its content which includes internally developed material, licensed material, user-generated content and other third party content. The website has over 3.3 million unique visitors/month. Most of BookRags’ revenues are earned from Sep. – June.
AG offers academic accreditation through their Washington School of World Studies. This allows some students to earn academic credit through participation in their travel programs. The company has always focused on high-quality, differentiated educational travel programs. The company has industry leading safety profile scores and high net promoter (customer satisfaction) scores. The company tries to build strong relationships with parents and children through a high touch customer service model throughout the pre- and post-travel experience. They recognize the importance of alumni relations.
Market Realist Take
Although the company reported a net loss of $7.1 million in 2013 as compared to net income of $1.7 million in 2012, the management is optimistic about the future. The company is in the middle of a turnaround, and has made a headway in shifting its business strategy to a high-engagement, multi-channel sales and marketing approach.
Spokane, Washington-based Ambassadors Group saw activist involvement back in 2012 from Lisa O’Dell Rapuano’s Lane Five Capital Management, who filed a proxy statement to replace three board members. In the filing, Lane Five Partners, which said it has held stock in Ambassadors since 2008, cited its concerns with Ambassadors’ declining stock price performance, operating record, capital allocation, and corporate governance. It recently nominated Bandera Partners’ Jefferson Gramm to the board. Bandera owns an 18.1% stake in Ambassadors.
AG believes it has made solid progress in 2013 in a challenging environment. It has ceased the China and Discovery Student Adventures product lines as they were not financially viable and has been reducing its operating expenses. However, the company saw a decline in gross revenue to $116.2 million from $139.9 million in 2012. AG said the decline in total revenue for 2013 was driven by a 14% decrease in total delegates that traveled on programs in 2013 compared to 2012. The decline in delegates was primarily the result of a 20% decline in delegates traveling on its core Student Ambassador Programs partially offset by a net increase in travelers on its non-core programs. BookRags’ total revenue and gross margin decreased approximately $0.2 million during 2013 compared to 2012 primarily due to AG’s inability to maintain prior levels of website traffic following search engine algorithm changes in 2013.
As of February 2, 2014, enrolled revenue for 2014 travel programs was $120.2 million, down 3.2% from the same point last year, based on enrolled travelers of 19,162 compared to 20,139. Enrolled revenue for the company’s core product, Student Ambassadors, is down 4.0% to $111.1 million compared to $115.7 million at the same date last year, based on enrolled travelers of 15,743 compared to 16,874. For 2014, AG expects gross revenues for all programs and operations to be between $110.0 million and $120.0 million and net income between $1 million and $3 million.
Youth travel is a growing segment of the global travel industry. In terms of competition, AG is at an advantage as it is one of the top premium travel offerings, as well as the only public pure play in the space. Some of the private companies operating in AG’s space include World Strides, Explorica, CHA, ACIS, NETC, and Passports.
In the U.S., eMarketer estimates that digital travel sales will grow at a CAGR of 5.9% between 2012 and 2017. The report adds that during the recession, online travel agencies (OTAs) achieved prominence and sped up the trend toward booking travel online. eMarketer also estimated last year that 40% of digital travel researchers will plan trips via tablets and smartphones in 2013, and that more than one-quarter of digital travel bookers will buy on their mobile devices.
The U.S. Commerce Department has estimated international travel to the country to grow 4% annually over the period 2013 through 2017. With economies globally starting to show signs of improvement, online travel stocks such as TripAdvisor (TRIP), Priceline (PCLN), Expedia (EXPE) and Orbitz Worldwide Inc (OWW) have gained. Priceline leads the pack and its fourth quarter results came ahead of the market consensus. The online travel sites have reported an increase in bookings due to investments in advertising as well as mobile technology. China’s Ctrip.com International, Ltd. (CTRP) said 65% of its transactions were booked through online and mobile channels, compared to about 50% a year ago. While U.S. mobile travel bookings was at $6.15 billion in 2012, PhoCusWright forecast this would rise to $39.50 billion by 2015. Although Ambassadors Group is not in direct competition with the above stocks, it could benefit from increased investments in mobile offerings.