I recently took a small position in Caldwell Partners and I thought I would would do a post on why I bought. Just to be clear, it’s quite a small position relative to my other holdings. As usual, I stole this idea from others (h/t Gerry Wimmer and DeepDiscount).
I view Caldwell as a position that has good risk/reward profile and will make a nice addition to a portfolio that’s primarily driven by faster growing (and more expensive companies).
Caldwell is an executive search firm that specializes in finding the highest levels of management and operations across many geographies and functions. They have been slowly expanding the number of partners over the years.
At $1.20 Caldwell has a market cap of 24.5 mil and an enterprise value of 8.1 mil. Yeah lots of cash. It trades at about 6.5x ebit and 2.2 ev/ebit. That’s statistically quite cheap. One would expect a slow growth (or no growth) business for those prices. They also pay a dividend that is yielding 6.7%.
See below for the income statement
There is top line growth with some operational efficiencies being gained.
See below for geographical mix.
Canada has been flat to slightly up while the US has been consistently growing.
See below for some quick analysis by geography. Note the different axis min/max and Europe is starting from a relatively low base.
The last quarter was particularly strong in Europe, we have seen this before.
The news release from the latest quarter had positive comments that indicates that momentum may continue.
“This was an outstanding quarter, bringing the firm to a new high-water mark for revenue,” said John Wallace, chief executive officer. “Our search teams throughout our geographic regions drove strong growth in both search volume and the value of assignments, despite pressure from foreign currency rates. We are especially pleased with the quarterly profit of our UK operations. With the largest level of new bookings and revenue in a single quarter in our history, we are positioned well for the fourth quarter. The significant increase in volume and our sustained focus on strategic additions to our partner team is creating search execution support needs, for which we will continue to hire in the fourth quarter.”
Wallace continued: “There is a lot of positive momentum inside our firm right now – our updated brand has been very well received since its debut, and we are excited about the recent expansion of our Agile Talent offering with the launch of our Value Creation Advisory Solution. We have an exceptional team of talented professionals at every level, all working towards a common goal – to provide value to our clients and shareholders – and it shows.”
I think the most obvious risk that came to my mind was LinkedIn taking away market share in executive search. Anecdotally, I would have expected this to have been a bigger impact on lower and mid level managers and not senior leaders in important roles. One would think that LinkedIn could actually be leveraged as a tool by Caldwell. I would think that given how important the roles are in the organizations that quality of candidates matter more than anything. I see the Caldwell brand as particularly important.
The other big risk that I can think of is the economy. Less hiring equals less need for Caldwell’s services. One does tend to get nervous after 9 years in a bull market.
These risks are not going away, so you will have to get comfortable with them if you take a position. For me, I will control these risks by limiting exposure to Caldwell.
- CEO – John Wallace. He jointed in 2008 and has previous experience in another executive search division of Hudson Highland Group. John owns about 20% of the shares.
- COO & CFO – Chris Beck. Joined in 2013 as CFO. Recently appointed COO as well. Also has experience at Highland Parnters (which is a division of Hudson Highland Group).
- Total compensation seems a little high, but much of the total compensation is based off performance bonuses.
- Both of these gentlemen have employment agreements in place.
- I think a key metric to think about is revenue per partner, which has been trending in the right direction.
- The board is comprised of 5 members with 4 of them being deemed independent.
- The Chair of the board is not the CEO of the company.
- The board is comprised mostly of corporate directors.
- Many of the board members are also on the board of other public companies.
- Almost all board meetings had full attendance in 2017.
- Compensation is a mix of fees and shares. Average 2017 compensation was $40k/director.
- I did some digging on the board members and there seems to be pretty good mix of strategic, operations and public market presence.
Summing it Up
I think a starter position is warranted. I would be willing to add with continued confidence in operational leverage or other positive news. Caldwell is nice because you get paid to wait.
Disclosure: the author is long Caldwell Partners at time of writing.