Liquidity Services Inc. (NASDAQ:LQDT) is another ‘post lockdown’ name that stands to benefit as the work on rebuilding economy begins. As the COVID-19 related restrictions ease, clearing inventory and scrap will be among top priorities for retailers and other businesses, leading to increased demand for companies like Liquidity Services.

This note is yet another effort to carry forward our theme this week of looking at companies that will benefit disproportionately when the businesses start to open up, a process that has already started, slow as it may be. Like previous names discussed, Uber Technologies (NYSE:UBER), Lyft Inc. (NASDAQ:LYFT), Applied Optoelectronics (NASDAQ:AAOI), and Infinera Corporation (NASDAQ:INFN), the market has yet to recognize the counter-cyclical nature of the business and the balance sheet is strong enough to sustain any shape of economic recovery, be it V, L or W.

Why bother with a micro-cap stock that is trading near a decade low?

Yes, the stock hasn’t made money for long-term holders, but what anyone who has followed the name for a while will tell is that the name works great after crises, which the stock chart will attest as well. After the financial crises in 2008-09, the stock went up more than 12x over the next 3 years.

After every economic crisis, companies are crammed with excess inventory and returns accumulated during the slowdown that they want third-party vendors like Liquidity Services to clear in a consolidated way.

Difficult to ease short-term pain

In the short term, the business is likely to suffer along with other retailers, with sellers largely shut down and buyers wait to get a better bargain.

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Since April, transactions on the company’s marketplaces have nosedived. With seller facilities closed and no employees coming to work, listings dry up as expected, which will lead to declining GMVs (gross merchandise value), margins, and cash flows.

But as economies start to open up, sellers will be willing to take a significant haircut on price just to move goods to make space for new inventory, followed by increasing buyer interest.

Last quarter, results for the company came within the guidance range, even though DoD’s Scrap contract was winding down, and expenses were at elevated levels to develop the company’s new e-commerce technology platform to boost consolidated marketplace strategy.

But medium to long-term prospects are promising enough

Liquidity Services Inc.
2017 2018 2019
GMV $629 $626 $640
Revenue $270 $225 $227
Gross Margins 46% 49% 50%

Besides the tailwind of economy opening up, the business should benefit from restructuring undertaken by the management over the last few years, with increased investment in creating an asset-light, low-touch consolidated marketplace while getting rid of low-margin businesses that had a negligible moat around. A process that was underway even before the pandemic hit, as the chart above shows.

Even amid lockdown, the Retail Supply Chain Group, the largest segment in terms of revenue, saw GMV increasing last quarter with demand coming for essential goods. The segment should continue to see strength from more and more online retailers adopting the Liquidation.com marketplace.

Capital Assets Group, the largest segment in terms of gross profit dollars last year, suffered due to travel restrictions and closed facilities in China interrupting supply from sellers and not allowing buyers to inspect goods for sale. China has already started to open up, as the U.S. and Europe open up, this segment should start to come back.

GovDeals, the largest segment in terms of GMVs last year, continues to see strong GMVs, but lack of volume from sellers, due to lockdown and facilities closures related disruptions, and buyers not being able to complete transactions has hampered the business. This business is highly dependent on state governments, as states open up, pent up demand should offer a strong boost to the segment.

Big catalysts for future growth are Machinio segment that continued to grow through the second quarter and Allsurplus.com, which has been the company’s pet project to showcase the self-service low-touch marketplace. Machinio is highly dependent upon small businesses, a segment of the market that may see the highest availability of seller inventory over the coming quarters after the lockdown.

Since March, the company started to shift its marketing focus from legacy marketplaces to AllSurplus.com leading to a 92% increase in traffic from targeted buyers within 2-3 months, highlighting the future potential offered by the new platform.

Valuation ignoring the comeback and those prospects

The stock is trading at less than 0.8 times sales and less than 0.6 times enterprise value to sales. The Company has enough cash to survive and invest through the downturn, an important barometer to measure a cyclical business. Profitability may elude for some time, but the business doesn’t require significant capital expenditure.

Disclosure: This is purely an academic exercise for our internal use and we are NOT recommending buying or selling based on these projections.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.



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