Liquidity Services Inc., LQDT, has suffered two significant sell-offs in the last couple of weeks. The latest was the largest, and supported by massive volume. These sell-offs have been attributed to comments by CFO Jim Rallo on future profit growth, insider sales, notably by CEO Bill Angrick, and latterly by less than complimentary comments from Jim Cramer and now, research firm Off Wall Street. I would love to see the Off Wall Street comments to see if they have hit the mark, but I have been unable to locate them.
I have now twice said that, at best, I think LQDT is fairly valued as a $40 stock. It closed today at $40.17. So, what should investors really be focusing on at LQDT? These are my opinions based on educated observation and experience. Anyone could figure this out if they tried hard enough, and I must say the bleatings from the analyst community reminds me exactly what most of them are. Sheep who don’t know much and are easily led. Which also ignores who actually makes a market in LQDT’s stock and might be concerned about their inventory.
If one is educated about LQDT, the insider sales shouldn’t really worry you. The senior execs all have quite decent option plans, even if those plans may have seemed parsimonious when they were issued, and the option holders don’t demonstrate any reluctance to cash in. But that has always been the case, nothing new there. As a reminder, actual stock sales are mostly activated by 10-5b1 plans, so they are price-actuated not a result of conscious decisions to sell stock. As to Angrick and his wife, cut them some slack, please. The LQDT stock has been very kind to their fortune but it makes up way too much of their personal estate. No-one should begrudge Bill cashing in some, bearing in mind this stock IPO’d (if that’s a verb) at $12. Entirely normal and sensitive behavior. While, in the past, Bill Angrick and his friend and co-founder Jaime Mateus-Tique have, in my opinion, killed rallies by selling into them (when volume was much lower), this time around, I think the angst about insider sales is misplaced.
Moving on to reports of CFO Jim Rallo’s comments of potentially lower profit margins. Jim is a straight shooter who is properly concerned with giving accurate guidance. If he in fact made such comments, I would say they are well placed. However it is very hard for investors to model likely outcomes. LQDT’s financial reports (e.g., ANNUAL REPORT and their latest investor slide deck) make much of GMV (gross merchandise volume) growth by macro business segment but there is no commentary or guidance of EBITDA percentage by subsidiary or business segment. Investors might be surprised to know how much profit some segments or subsidiaries contribute or don’t (or maybe not). This is pertinent information since the LQDT annual report discloses that both of its contracts with the Federal Government are in discretionary annual renewal options and will be up for re-bid in a few short years. While it is my opinion that it would be hard for anyone to take these contracts away from LQDT, that does not mean it cannot happen or that the renewal terms will be as advantageous to LQDT as they are now. The educated investor should focus on segment profitability very closely at LQDT.
We have two material contracts with the DLA Disposition Services under which we acquire, manage and sell surplus and scrap property of the DoD. If our relationship with the DoD is impaired,we are not awarded new DoD contracts when our current contracts expire, any of our DoD contracts are terminated or the supply of assets under the contracts is significantly decreased, we would experience a significant decrease in revenue and have difficulty generating income. The Surplus Contract accounted for 32.8%, 29.9%, and 30.3% of our revenue and 21.8%, 19.9%, and 18.5% of our GMV for the fiscal years ended September 30, 2009, 2010 and 2011, respectively. The Scrap Contract accounted for 21.5%, 25.0%, and 25.5% of our revenue and 14.2%, 16.7%, and 15.4% of our GMV in fiscal year 2009, 2010 and 2011, respectively. We believe that these contracts will continue to be the source of a significant portion of our revenue and GMV during their respective terms. The Surplus Contract has a three-year base term that expires in February 2012, subject to the DoD’s right to extend for two additional one-year terms. The DoD has exercised its first extension option. The Scrap Contract has a seven-year base term that expires in June 2012, subject to the DoD’s right to extend for three additional one-year terms. The DoD has exercised its right to extend the performance period of the Scrap Contract by one year to August 2013. The contracts were awarded by the DoD through a competitive bidding process, and we be required to go through a new competitive bidding process when our existing contracts expire.
The final matter that should be discussed is merger integrations. In my opinion LQDT’s recent acquisition of GoIndustry Dovebid is probably its most crucial acquisition to date, although it has not received the attention it deserves. Kudos to Bill Angrick for the price he paid, too. (Side note: Although GoIndustry was listed in London it is not really a UK or European company as some have said. It is the old SF-area Dove Bros auction/liquidation company that could never get out in the USA, hence the London listing). LQDT has been trying to break out in the capital goods market aside from its Federal and Network Intl businesses for some time. In my opinion, the sales side of GoIndustry is its ticket to success in this area, however as anyone with a whit of experience in mergers and acquisitions will tell you, such a successful integration is not a slam dunk. LQDT is a company deeply reliant on technology. Its CTO apparently left the company earlier this year and has not yet been replaced, at least so far as one might ascertain from its website. Let us hope this does not adversely impact the integration of GoIndustry with LQDT’s other operations.
Pricing on LQDT? Clearly if I had the definitive answer to that I would not make my closing disclosure. The current Fibonnaci retracement it is sitting on is quite a strong one that is roughly at an area that offered previous resistance. We may see the stock hold around this ~$40 level for a while. While some analysts continue to shamelessly pimp $60 and $70 targets I would be surprised to see the stock overcome its recent sellfest to that extent. If it does recover, I would expect significant resistance at around $45. To the downside, if $40 doesn’t hold then next stop looks like $33-$35 with a 52-week low of about $20 as an absolute worst-case (I would be amazed to see that price but who knows?).
In the June 23rd issue of Barron’s magazine, Michael Santoli wrote in his “Streetwise” column:
THE GENERAL MOOD OF ECONOMIC SOBRIETY has wrung growth premiums out of emerging-market equity plays and commodity proxies, forcing growth-chasing capital into an ever-narrower group of stocks beloved for a hoped-for ability to expand organically and indefinitely. A cluster of consumer stocks with generous valuations that imply aggressive growth expectations looked bulletproof near the market’s April highs, but one by one are succumbing to softening growth outlooks.
I thought at the time that this was a remarkably canny comment from Santoli, which may have been prescient about LQDT, as it turns out.
In closing, perhaps the real scandal here, if there is any at all, was Investors’ Business Daily readiness to pop LQDT back into its IBD50 after a week’s absence at the #5 spot. Good call, guys. Good call. Not.
I do not presently hold any long or short stock or options positions in LQDT nor do I currently plan to make any. I have not held any long or short stock or option position in LQDT since early May 2012.