In 1977, John P. Calamos, Sr. started a boutique investment management company focused on using convertible securities to manage risk. The company was one of the first to apply the Black-Scholes theory that weighs the stock price, strike price, expiration date, risk-free return and the standard deviation of a stock to convertibles. Six years later, Nick P. Calamos joined the firm and developed a software system for its proprietary security evaluation systems that strive to maximize investor returns while minimizing risk. 

Calamos Asset Management (CLMS) now employs more than 300 people at its headquarters in Naperville, Illinois, as well as sales and client service professionals throughout the Unites States and in England.

The Calamos investment philosophy concentrates on a comprehensive understanding of the total value of a company and the relative attractiveness of the securities within its capital structure. Moreover, management believes that the key to consistent, long-term success and wealth building is achieving the optimal balance between enhancing investment returns and managing risks. Therefore, the company now offers a plethora of equity, fixed income, and alternative strategies with a rather impressive record of capturing the market’s upside while limiting downside volatility.  

At this juncture, Calamos Asset Management seems set for a virtually flat year-over-year earnings performance for 2011, and is likely to post a year-over-year drop in share net during the current year. Notably, assets under management (AUM) have fallen off a bit of late, mainly due to market returns, and given recent trends, we look for net outflows of approximately $500 million in 2012, which is modestly better than what we expect to see once 2011 numbers are released. What’s more, general and administrative expenses have increased lately, given that CLMS added distribution and marketing staff in 2011, and an ongoing outsourcing implementation, which should help narrow margins, will not be completed until the third quarter of this year. Therefore, our expectation of declining revenues in 2012, combined with a bit of margin pressure, is likely to lead to approximately a 15% year-over-year drop in earnings, on about a 7% decline in sales.

On a brighter note, the company is in solid financial shape, having finished off the third quarter of last year with $82 million in cash, long-term debt of $92.0 million, and working capital of just over $416 million. And going forward, we would not be surprised to see management use an expected uptick in cash flow to bolster the dividend payout, which was cut back during the 2008-2009 recession.

Investors should note that the company’s top and bottom lines are rather sensitive to changes in AUM, which is a function of investment performance and investment returns on existing assets. In addition, the company has a rather complex corporate structure, with voting control held by the Calamos family. As a result, public shareholders have limited input when it comes to the company’s operations and the deployment of excess capital.   

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.