Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Liquidity Services (LQDT 0.83%) fit the bill? Let's look at what its recent results tell us about its potential for future gains.
What we're looking for
The graphs you're about to see tell Liquidity's story, and we'll be grading the quality of that story in several ways:
- Growth: are profits, margins, and free cash flow all increasing?
- Valuation: is share price growing in line with earnings per share?
- Opportunities: is return on equity increasing while debt to equity declines?
- Dividends: are dividends consistently growing in a sustainable way?
What the numbers tell you
Now, let's look at Liquidity's key statistics:
LQDT Total Return Price data by YCharts
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Revenue growth > 30% |
80.3% |
Pass |
|
Improving profit margin |
98.1% |
Pass |
|
Free cash flow growth > Net income growth |
(35.4%) vs. 257.1% |
Fail |
|
Improving EPS |
191.9% |
Pass |
|
Stock growth (+ 15%) < EPS growth |
152.8% vs. 191.9% |
Pass |
Source: YCharts.
*Period begins at end of Q2 2010.
LQDT Return on Equity data by YCharts
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Improving return on equity |
40.1% |
Pass |
|
Declining debt to equity |
Raised from zero |
Fail |
Source: YCharts.
*Period begins at end of Q2 2010.
How we got here and where we're going
Liquidity put together a solid performance and has earned five out of seven passing grades. However, one of those misses could be problematic: the company's free cash flow has been in decline over the past three years, and it now earns less than half as much free cash flow as net income. As a result, Liquidity has had to raise debts to make further investments in its business. That's not enough to call this stock stale, as a perfect score could be in store next time around with only a few improvements. Let's dig a little deeper to find out what Liquidity is doing to get from good to great.
Liquidity has recently been struggling through a period of weakness, which has led to a disappointing forecast of roughly $231 million in gross merchandise volume, as compared to an earlier range of $250 million to $275 million. However, Benchmark analyst Daniel Kurnos recently raised his price target on Liquidity nonetheless, from $38 to $40. And with a rapidly growing customer base spread across 20 industries, the company is continuously adding new jobs to meet the needs of its sales and technology divisions. Fool contributor Rich Smith notes that Liquidity also expects to grow its net profits by about 18% per year over the next several years.
Liquidity has also been strengthening its market position by purchasing smaller auction sites elsewjere in the world. Last year, the company acquired London-based GoIndustry DoveBid, which serves large entities across North America, Europe and Asia, and it has also added over 458,000 professional buyers and 1,000 new annual online sales events to that subsidiary's site. In addition, the company may also benefit from a long-term contract with Wal-Mart, which has been aggressively expanding its presence into international markets.
Putting the pieces together
Today, Liquidity Services has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.
