(By Michael Vodicka) Upgrades are universally appealing to human beings. We see it happen with consumers all the time. A family buys a new house, gets a new car or remodels their kitchen with high-end appliances. It happens on the corporate and government fronts too, with companies and agencies purchasing new computers, office equipment and other resources to keep their employees and operations productive and competitive. But staying on the front end of the upgrade cycle and purchasing new equipment doesn't always mean that the old stuff is ready to roll over and die.
That is where Liquidity Services, Inc. (LQDT) comes into play, providing online market places for salvage goods for corporations, government agencies and consumers alike. The company offers approximately 500 products organized into various categories that include consumer electronics, scientific equipment, industrial capital assets, fleet and transportation equipment and apparel. Liquidity services has been around for about 13 years, founded in 1999, and has a market cap of $2 billion, putting it on the threshold of breaking into mid cap territory.
With corporate, consumer and government spending holding up fairly strong in 2012 in spite of economic headwinds, shares of LQDT have seen big gains, currently trading up more than 69% on the year in a market that is basically flat. That is consistent with what we saw from the company's latest quarterly report, posting strong Q1 results from early May that handily beat expectations.
Q2 Looks Great
Revenue for the period was up 41% from last year to $126 million. Earnings also looked great, coming in at 48 cents, 45% of expectations, where the company has an average earnings surprise of 72% over the last four quarters. Total sales volumes through its various distribution channels, a key performance metric for the company, increased 59% to $218 million. Liquidity Services exited the quarter with 50 Fortune 500 companies, more than 4,500 federal state and local government agencies and 1.7 million registered buyers utilizing its marketplaces for salvage goods.
Reason to be Bullish
It's pretty clear that Liquidity Services is going through a stage or rapid sales and earnings growth that has put a serious bid into its share price. But looking forward there are still plenty of reasons to be bullish on the company.
The first is the very bullish movement we have seen in estimates off the good quarter. The full-year 2012 estimate jumped close to 50%, surging to $1.50, a 19% growth projection from last year. The full-year 2013 estimate has also been on the move, jumping 35% in the same time to $1.85, an even more bullish 24% growth projection. Taking a look at those estimates says a lot about this stock's big gains over the last few months.
Longer term, analysts are projecting annual earnings growth of 29% over the next 5 years, easily outpacing the industry average of 20%.
Liquidity Services also has an impressive financial profile, with cash and equivalents of $105 million against just $32 million in long-term debt. Its debt-to-equity ratio of 13% is far below the S%P 500's 94% but also below the industry average of 46%.
The company will use this financial flexibility to drive growth and innovation, with CEO Bill Angrick says the Liquidity Services will "fund major upgrades in our technology infrastructure to support further integration of our existing businesses and online marketplaces."
But even though there have been huge gains on the chart, rising estimates have helped keep the valuation picture in check. Liquidity Services' PEG ratio of 1.23X is safely below the 6-yr. median of 1.31X. The high print from this period is 2.18X with a low print of .63X. As a very high-margin business, its price-to-sales multiple of 5X is almost twice the industry average of 2.44X.
On the chart, LQDT has had an amazing year, currently up more than 69% on the year after blasting higher on the good quarter. There is a bullish trend line that began in early February that is in play, so this is a place to look for support on any weakness or a pullback. Longer term, shares do look a bit extended on the chart, but the discounted valuation supports more upward movement. Take a look at the chart below.
Liquidity Services, Inc. (LQDT) 2012 Daily Chart