Stock Cheat Sheet: Liquidity Services

Get to know a company in less than five minutes: That's what a Motley Fool Cheat Sheet is all about. If you're new to Liquidity Services (Nasdaq: LQDT  ) , consider this your Foolish way to get introduced and be in the know.

What it does
Liquidity Services is eBay (Nasdaq: EBAY  ) for the government. The company runs multiple auction websites (such as govliquidation.com, govdeals.com, liquidation.com, and liquibiz.com) that work with different agencies and government organizations to help them find buyers for their excess inventories. Like eBay, Liquidity Services relies on network effects to dominate its specific market. The company has exclusive contracts with the U.S. Department of Defense to resell its scrap and surplus assets. By being the only seller in town, Liquidity is able to attract buyers; and the more buyers that come, the more appealing the company’s marketplaces become for other, nongovernmental sellers. Unlike eBay, Liquidity Services primarily handles bulk goods (like this auction for 8,745 bearing sleeves).

How it stacks up
A large part of Liquidity Services’ appeal is that nobody else is really doing what they’re doing. Their competitors are traditional liquidators and fixed-site auctioneers. Liquidity is really the first to bring this service into the Internet era. That said, it is interesting to compare how well the company operates compared to its online marketplace peers.

Company

3-Year Revenue Growth

Gross Margin

Net Margin

Return on Capital

Liquidity Services

14.9%

41.7%

4.0%

14.2%

Copart (Nasdaq: CPRT  )

12.1%

47.3%

19.6%

15.5%

eBay

11.9%

71.8%

27.3%

9.3%

GSI Commerce (Nasdaq: GSIC  )

19.0%

59.6%

-0.7%

1.6%

Overstock.com (Nasdaq: OSTK  )

7.7%

18.4%

1.6%

9.3%

What to watch out for
Traditional business threats such as the possibility of new entrants or incumbent competitors encroaching on Liquidity Services’ government auctions and liquidation services turf aren’t really a problem -- as long as the company maintains its exclusive contracts with the Department of Defense. Therein lies the rub. By 2012, Liquidity’s two most important contracts, which accounted for 54% of total revenue last year, will expire. Being able to renew those contracts (and preferably with even more favorable terms) is absolutely crucial to the company’s future success.

Why you should care
It is always a little disconcerting when one organization (in this case the DoD) holds so much power over the operational results of a company. Liquidity Services realizes this and has actively tried to increase its non-DoD business segment by signing up more than 450 corporate clients and taking its expertise in handling large quantity sales into the private sector. The company’s stock has jumped about 30% since I first came across it late last year. If it can hold onto its existing market and continue to expand into new territory, it might be poised to do much more.

If you want to learn more about companies like Liquidity Services, check out our premium technology and growth newsletter, Motley Fool Rule Breakers.

Fool analyst Sean Sun does not own any shares in the companies mentioned.

Copart is a Motley Fool Rule Breakers recommendation. Copart, eBay, and Liquidity Services are Motley Fool Stock Advisor picks. Motley Fool Options has recommended a bull call spread position on eBay. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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