Top-line growth is slowing for Liquidity Services (NASDAQ: LQDT ) , and investors are wondering how long can the company maintain its advantage, as the company has yet to diversify its revenue stream. Accordingly, shares retreated 45% in 2013 and are now trading at depressed valuations. The ultimate outcome remains unknown, as key contracts are set to expire. The markets are either mispricing growth prospects, or valuations appropriately reflect a diminished competitive advantage.
Surplus and scrap as a business model
One person's trash is another person's gold, and Liquidity Services has transformed that concept beyond just a clever quip into a $506 million business model. Liquidity Services is the largest public company providing manufacturers, corporations, and the U.S. government with asset recovery and disposition services. The firm is a logistics company that recycles surplus and scrap goods for resale on its various online bidding platforms. In FY13, Liquidity Services acquired and disposed of $973 million worth of gross merchandise volume, or GMV, through its online marketplaces.
One down, one to go
56% of FY13 sales came from the Department of Defense through two contracts, one of which was renewed in early December. The renewed contract extends performance into 2015 and covers the acquisition, management, and sale of all scrap DoD materials (26% of Liquidity Services' FY13 revenue). More importantly, though, is the outcome of Liquidity Services' surplus contract, which expires in February and accounts for an even greater 30% of revenue. The DoD already exercised two annual renewal options, and any remaining options have been exhausted under the original contract, leaving them up for competitive bid.
Is one shareholder's trash another shareholder's gold?
That question rings loudly in the minds of investors, with shares trading at a forward P/E of 13. The answer is uncertain and hinges upon the outcome with the DoD. Liquidity Services could lose as much as $151 million in revenue, should the DoD proceed with another suitor. Shares have also decreased due to factors other than concerns over the DoD. While GMV increased a healthy 13% in FY13 to $973 million, this was well below the 58% GMV growth that Liquidity Services notched the previous year.
A similar story becomes apparent upon examination of online market place peers such as eBay (NASDAQ: EBAY ) whose market place segment reported a total GMV increase of 10% quarter-over-quarter. However, eBay shares trade at a lofty premium to Liquidity Services at 25 times EPS. Perhaps a differentiating factor that explains the valuation gap is that analysts have forecast 15% top-line growth for eBay in 2014, while revenue for Liquidity Services is expected to increase only 1%.
If consistently exercising options to renew is any indication, then Liquidity Services is likely in the clear and buyers will benefit from heightened selling pressure over the past year. On the flip side, remember that the DoD is operating on a continuing resolution through January 14th, and government outlays could be best categorized as anything but certain. These are just a few of things to consider that could make or break 2014 for Liquidity Services.
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