This online auctioneer saw its stock dive following merger issues, but its potential—and its discounted value—make it worth a 'bid' for aggressive investors, says Ari Charney of Investing Daily.
Liquidity Services (LQDT) operates market-leading online auction portals, including Liquidation.com and GovDeals.com, for businesses and governments to buy and sell surplus assets and inventory.
This "reverse supply chain” is comprised of damaged goods returned to retailers, overstock, and even scrap metal. Buyers include discount retailers, resellers, and scrap recyclers, among others.
Sellers include seven of the top ten US retailers, as well as the US Department of Defense (DOD) and over 4,200 state and local government agencies. In fact, the DOD accounts for nearly 30% of its seller base.
Liquidity Services operates in a highly fragmented marketplace where it hopes its greater efficiency and network effect will drive long-term growth. The company largely competes with traditional local auctioneers and liquidators, whose scale and reach are limited.
The $1 billion company is down more than 50% from its 52-week high, and short interest as a percentage of float was recently at a high of almost 31%, equivalent to nearly 19 days of average trading volume.
Prior to this dismal performance, LQDT was a darling of growth stock investors, with shares gaining almost 31% annualized over the past five years, in part thanks to a staggering gain of nearly 163% in 2011.
The company has a reputation as a counter-cyclical firm that fares best during the destocking that typically occurs following economic downturns. As the economy has strengthened, sales and earnings have begun to flatten.
The stock began to falter in mid-2012, and started dropping in earnest as declining analyst expectations were confirmed by management's disappointing guidance for fiscal-year 2013 in late November.
Selling momentum increased when the company missed revenue estimates by 6.6% for its fiscal first-quarter 2013 (ended December 31). Part of the problem is slowing gross merchandise volume, due to difficulties integrating a recent acquisition.
QDT acquired the British firm GoIndustry DoveBid in July of last year for $31 million. Though the deal expanded its worldwide network of buyers and sellers, the company has since announced that the acquisition will be a drag on earnings throughout fiscal 2013, as it invests several million dollars toward its integration. The acquisition had previously been forecast to be accretive to 2013 earnings.
Management is also maintaining a cautious outlook due to the uncertain macroeconomic environment. As such, it lowered its guidance for fiscal 2013 earnings per share to a range of $1.90 to $2.02, from a previous range of $2.05 to $2.23.
The good news is that once LQDT completes the integration of these assets, Wall Street expects earnings to rise by 19% in 2014. In fact, analysts expect the company to sustain this pace by growing earnings 19.4% annually over the next five years, as the company expands via acquisitions and the network effect.
At present, all 11 analysts who track the stock currently rate it a buy, with an average 12-month price target of $44.83, which represent a 40.6% gain from recent prices.
LQDT has high inside ownership, with almost 21% of shares outstanding held by corporate insiders. So management is certainly incentivized to continue growing the company. Indeed, the company is working toward a goal of $2 billion in gross merchandise volume by fiscal-year 2016, which would be an increase of more than 131% from last year's results.
At year-end, Liquidity Services had $46 million in cash on its balance sheet, and just $18 million in long-term debt.
Although shares have bounced more than 11% from their 52-week low, extreme caution is warranted, especially given the fact that this stock is clearly in the crosshairs of short sellers. But for aggressive investors, it might be worth a nibble.