Cabot Small-Cap Confidential Issue: November 2, 2023
This month we’re adding a small company that specializes in the opaque and inefficient market for selling surplus and salvaged goods.
The company has a market cap of just $580 million and is growing revenue and EPS by double digits. It’s an interesting setup, especially as government agencies and corporations increasingly look to save money and achieve sustainability goals.
All the details are inside this month’s Issue.
The Big Idea
Roughly 17% of all retail sales are returned. That’s well over $700 billion worth of stuff that goes back, every year. A lot of it can’t be resold for full price.
In the heavy equipment market, around $350 billion worth of used equipment is sold every year.
How about obsolete and discarded government property? Seized assets? Capital equipment from manufacturers that no longer need it?
Yup, it’s all out there waiting to find a new home.
They say one man’s trash is another man’s treasure. The challenge is that finding the “treasures” isn’t all that easy.
If you want to buy something new, no problem. Go online, to a dealer, broker, whatever and you’ll usually find what you need.
But the marketplace for finding a deal on used stuff is a heck of a lot more inefficient. Yes, eBay (EBAY) and Craigslist have made it easier. But those platforms aren’t designed for moving higher-ticket items and 500 mittens, for example.
And yes, there are channels that move obsolete goods to discount retailers like TJ Maxx (TJX). But they’re not selling that bucket loader city officials are looking to get off an abandoned lot.
There has always been demand for used, surplus and salvaged stuff. But when used stuff is increasingly valuable, there are tax benefits and a growing sustainability movement, there’s a lot more incentive to move things through what’s called the reverse supply chain, or what’s also known as the circular economy.
It can even help public companies achieve their ESG (Environmental, Social and Governance) goals, which is a big deal for socially conscious investors.
Here’s another wrinkle ...
We’ve all been hearing about the U.S. Government’s rising debt burden.
At the end of the 2023 fiscal year in September, the federal deficit was $1.7 trillion. That’s way over the pre-pandemic high of $1.1 trillion. In the twelve months leading up to the end of the fiscal year, the government brought in $4.4 trillion while outlays totaled $6.1 trillion!
That trend is not sustainable, no matter how you slice it.
When a trend like this takes off, government officials start looking around to see what they can sell off.
We’re not just talking staplers and dusty printers. But big-ticket items, like rail cars, barges, property, etc.
Today we are investing in a company that has made it their business to streamline the inefficient and opaque market for used, surplus and salvaged goods. It works with government entities as well as both large (like Amazon (AMZN)) and small retailers.
I think it’s an interesting company in general, and especially so given the times we live in today.
Liquidity Services (LQDT) operates the world’s largest business-to-business (B2B) e-commerce marketplace for matching buyers and sellers of surplus and salvage assets.
The company’s platform connects millions of buyers and thousands of sellers through auction marketplaces, search engines, asset management software and related services.
Like most online marketplaces, the key benefits are efficiency, transparency, network effects, etc. But in Liquidity Services’ case, there is also a special sauce added to the mix because of the uniqueness of dealing in surplus goods, which is a somewhat inefficient market where price discovery is nuanced.
The company was founded in 1999, went public in 2006 and has a market cap of under $600 million. It works with all manner of sellers across industries, including Walmart (WMT), Caterpillar (CAT), The Home Depot (HD) and Boeing (BA), among others.
To be clear, online auction houses for selling surplus goods are nothing new. But Liquidity Services is doing what other companies that play in small, niche markets have failed to do by going after large markets that are collectively worth around $130 billion.
It focuses on capital and surplus assets, salvaged goods, excess inventory and customer returns.
This part of the market – known as the reverse supply chain or reverse supply logistics – is an extremely fragmented market.
On the very small scale, you’ve got newspaper classified sections, yard and estate sales, Craigslist, Marketplace, and auctions. On the medium-size scale you have companies like eBay.
The problem with all of these channels is that they are inefficient – especially for large quantities of surplus goods, scrap metal and huge capital assets.
Moving a 1986 6x6 army vehicle, 30,000 pounds of stainless steel, 50 returned clothes dryers or 100 outdated tablet computers requires a special blend of documentation and logistics capability to be efficient and profitable.
Liquidity Services has been addressing this multi-billion-dollar market for over 20 years.
With governments and many of the biggest corporations in the world looking to operate as efficiently as possible – and recapture the value in goods that have already been produced – it’s looking like a good market to be in.
Products & Services
Liquidity Services reports revenue from four segments. Here are a few details on each.
Two marketplaces, GovDeals and Bid4Assets (government real estate, acquired in 2021), with self-directed solutions that help federal, state and local government agencies in North America sell surplus, salvage and real estate assets.
In 2022 GovDeals generated 59.3% of total company revenue and 40% of operating income. In Q3, segment revenue grew by 4% thanks to higher volumes and price gains.
Retail Supply Chain Group (RSCG)
A group of three marketplaces, Liquidation.com, Secondipity and AllSurplus, for North American-based corporations to sell surplus and salvage consumer goods. RSCG also includes services for returns management, asset recovery and e-commerce. This segment has multiple vendor contacts (purchase model, see “Business Model” section) with Amazon (AMZN), which accounted for 55% of segment revenue in 2022.
In 2022 RSCG generated 21.2% of total company revenue and 35% of operating income. In Q3, segment revenue grew by 20% thanks to recurring product flows.
Capital Assets Group (CAG)
A suite of managed and self-directed services aimed at commercial sellers across the Americas, Europe, Australia, Asia and Africa to help them sell surplus and idle assets. Services include surplus management, asset valuation, asset sales and marketing. Marketplaces used include AllSurplus, GoIndustry DoveBid and GovDeals.
In 2022 CAG generated 15.2% of total company revenue and 18% of operating income. In Q3, segment revenue was up 15%.
Acquired in 2018, Machinio is a global search engine platform with selling tools (marketing, website hosting, email marketing, inventory management) for listing used equipment from the construction, machine tool, transportation, printing and agriculture sectors. Pricing follows the subscription model.
In 2022 Machinio generated 4.3% of total company revenue and 7% of operating income. In Q3, segment revenue was up 14%.
Sales & Marketing Investments: Investments in S&M may curb margin expansion, but management sees opportunity to grow market share so continues to invest, especially in areas like heavy equipment (growing by 30%) and retail (+20%).
AllSurplus Deals Channel: Management has flagged this as a particularly strong business (business surplus, heavy equipment, machinery, etc.), supported by new pickup locations (Cincinnati, OH, Phoenix, AZ, Pittston, PA and Plainfield, IN) with more to come. Pickup locations keep costs low and margins up.
GovDeals Next-Gen Marketplace: A refreshed marketplace with better tools and user experience is expected to help improve search, navigation and bidding, which should then drive higher sales and margins. Look for more on this in the near future.
Margin Expansion: The company continues to shift toward the consignment business model, which has the effect of lowering revenue as a percent of GMV but increasing profit margin. The RSCG segment has particular margin expansion potential.
Stock Buyback: The Board of Directors authorized a new stock repurchase plan of $8 million on March 13, 2023. This plan had $1.8 million remaining as of June 30.
Foreclosure Legislation: The company is working with local and state governments to push through legislation that would allow online auctions for foreclosed and tax-foreclosed real estate. This would help the Bid4Assets business within the GovDeals segment.
The Business Model
Liquidity Services sells through three transaction models; purchase (Liquidity buys from a seller, marks up and sells), consignment (Liquidity earns a commission on goods that sellers move through its various marketplaces) and other (mainly subscriptions for Machinio). The consignment is by far the largest piece of the total revenue pie (38% over the last nine months). It’s worth noting that a higher mix of consignment selling translates to a lower total GMV because Liquidity Services doesn’t buy the goods under the consignment model. Keep this in mind if and when looking at revenue as a percentage of GMV.
The Bottom Line
Over the last nine months (through June 30, 2023) the company has grown revenue by 14.4% to $234.5 million. Gross Merchandise Value (GMV) has grown by 2.9% to $887.5 million, so revenue as a percentage of GMV was in the mid-20% range (normal for the company).
In Q3 2023 (ended June 30), revenue grew by 16% to $80.8 million while GMV grew 3% to $334 million. Adjusted net income was $0.28, up 33% from $0.21 in Q3 of last year.
Registered buyers are up 5% to 5.1 million over the last twelve months, auction participants are also up 5% (to 924,000) and completed transactions were about flat at 252,000.
The company ended Q3 with zero debt and $105.9 million in cash. It repurchased $4.2 million worth of shares during the quarter.
Current consensus is that Q4 (report date of December 7) revenue should grow by 10% to $82.7 million and EPS should grow 26.3% to $0.24. Looking out to 2024, revenue is currently seen growing by 8.3% to $343.6 million while EPS is seen up 7.6% to $0.99.
Low U.S. Foreclosure Rates: Yes, it’s weird that this is a “risk” to a business. But Liquidity Services deals in distressed real estate through the acquired Bid4Assets marketplace, and when foreclosure rates are low there’s not a lot of business. I’d say hopefully this will change but ... in the grand scheme of things it may be better for our other investments if this remains a “risk.”
Inflation, Supply Chain, Macro: All of these things can wreak havoc on the surplus market, though in recent years disruptions have been a net positive. At the moment, the efficiency trends of an economy the Fed is trying to cool down suggest a good environment, though that may change.
Seasonality: A couple of Liquidity Services’ segments have peak seasonality in Q2 and Q3.
Buyer & Seller Mix: As a marketplace operator, Liquidity Services needs both sides of the equation to come together. Any big disruptions in either seller supply or buyer demand could hurt the stock.
Technology Innovation: A digital marketplace needs constant innovation to stay relevant. Technologies like AI, digital marketing, and big data are just three examples of areas where management needs to keep pushing forward, or risk failing.
Aucnet (Japan, expanding internationally) and Auction Technology Group (U.K.) are the “bigger” publicly traded companies. Beyond those players, Liquidity Services competes with all sorts of smaller B2B online marketplaces, liquidators, import/export companies, auction websites, etc.
Trading Volume: 90-day average trading volume is 114,000 shares. We could have a minor influence on any given day.
Historical Price: IPO in 2006, hit an all-time high near 65 in May 2012. Multi-year downtrend and shares were below 5 in early 2016. Quick run above 9 that year but lost momentum and never got back above 9 before the pandemic hit, which sent LQDT to around 3. Bull market rally pushed LQDT to 30 by mid-May 2021. Earnings contraction in 2022 pulled the stock, which had some volatile weeks, into the low-to-mid teens. Early months of 2023 were spent in the 12 to 16 range, then LQDT started to gain momentum after May. Stock crossed above its 200-day line on May 11 and has remained above it since, also staying at or above both its 50- and 25-day moving averages (DMA). A mid-October rally to 20.8 was followed by a quick retreat to the 50-DMA at about 18.5, which is where the stock is now.
Valuation: LQDT currently trades with an EV/Trailing Revenue multiple of around 1.6. Over the last twelve months, this multiple has ranged from a high of 1.7 to a low near 1.1. Higher profit margins should drive multiple expansion.
Buy Range: Over the next couple of weeks expect to buy LQDT within the 17 to 21 range.
The Next Event: The Q4 fiscal 2023 earnings report is expected on December 7.
|Stock Name||Date Bought||Price Bought||Price on 11/1/23||Profit||Rating|
|Build-A-Bear Workshop (BBW)||10/5/23||27.87||26||-8%||Hold|
|Duolingo (DUOL)||6/1/23||152||149||-2%||Buy 1/2|
|Flywire (FLYW)||8/4/22 & 11/9/22||-||-||-||SOLD|
|Liquidity Services (LQDT)||7/6/23||New||19||New||Buy|
|R1 RCM (RCM)||7/6/23||18||12||-32%||Sold 1/2, Hold 1/2|
|Repligen (RGEN)||11/2/18 & 12/31/18||59||131||122%||Sold 3/4, Hold 1/4|
|SI-Bone (SIBN)||5/4/23 & 8/24/23||-||-||-||SOLD|
|TransMedics Group (TMDX)||7/7/22||34||38||12%||Sold 3/4, Hold 1/4|
Please email me at email@example.com with any questions or comments about any of our stocks, or anything else on your mind.
Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.
Disclosure: Tyler Laundon owns shares in one or more of the stocks mentioned. He will only buy shares after he has shared his recommendation with Cabot Small-Cap Confidential members and will follow his rating guidelines.
The next Cabot Small-Cap Confidential issue is scheduled for
December 7, 2023.