“How much am I bid for two truck loads of electrical gadgets, ranging from laptop computers and MP3s to mobile phones? The reserve price for the job lot is $15,599.” This was just one example of the thousands of auctions being run online on Liquidation.com last week. Given the dire state of the economy (major retailers such as Woolworths and Land of Leather seem to be going bust every month), more and more goods are being sold off at auctions, often at rock-bottom prices.
Liquidity Services Inc (Nasdaq:LQDT)
The owner of this website, along with several other popular sites, such as Govliquidation.com and Liquibiz.com, is Liquidity Services. It acts as the world’s largest online marketplace for wholesale goods, serving both corporations and government organisations that want to get rid of surplus, returned, end-of-line, or even confiscated assets.
Its top sites provide over one million professional buyers with access to such assets, with Liquidity taking a cut of the sales proceeds. Most of the buyers are either ‘mom-and-pop’ stores or eBay ‘power sellers’, who in turn sell the items on to consumers.
So why has the share price halved since last summer? The main culprit for recent falls is the 45% decline in its scrap-metals unit, due to lower commodity prices. Additionally, the firm was hit by aggressive in-store discounting over Christmas from the likes of Wal-Mart, which kept surplus stock off the resale market. However, these look to be temporary setbacks – Liquidity’s wholesale business model is still very much intact.
Indeed, leaving aside the recent share-price volatility, during the last quarter merchandise volumes rose 21%, registered buyers increased 44% and transaction volumes jumped 71%. Moreover, the valuation appears attractive. For the year ending September 2009, the board is predicting underlying earnings per share of between $0.45 to $0.47 per share, putting the firm on a reasonable p/e ratio of 12.8, falling to 11.3 in 2010.
Reassuringly, the balance sheet is secure, with $53m of net cash (worth $1.88 per share) as at December 2008. There are risks. Competition from the likes of Amazon and eBay is increasing and the problem of price deflation could further reduce profits. UK investors in particular need to watch foreign exchange rate fluctuations as 96% of turnover is generated in America. That said, with Liquidity’s core business set to boom, the stock looks to be another cheap counter-cyclical play for the brave investor.
Recommendation: SPECULATIVE BUY at $5.90
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.