As with any investment, it is necessary to determine the long term return potential versus the risk that you are accepting by making the investment. One of the simplest ways to get an overview of this risk/reward concept is through a SWOT analysis, which highlights the Strengths, Weaknesses, Opportunities, and Threats of a given company. Trading almost 50% below its high for the year, reverse logistics provider, Liquidity Services, Inc. (NASDAQ:LQDT), or LSI, has become the latest growth story to come crashing back to earth. After trimming full year EPS guidance by 10%, the market did the same to the company’s stock price.
Strengths:
Sticky Business- From retailers such as Wal-Mart Stores, Inc. (NYSE:WMT) or Target Corporation (NYSE:TGT), to government agencies, such as the Department of Defense, LSI’s wide array of reverse logistics operations make their services very hard to replace. For instance, Wal-Mart uses 3 of LSI’s services: Jacobs Trading Company, Liquidation.com Direct, and TruckCenter.com. Being the dominant business in the online wholesale market, LSI has leverage in keeping almost all of their customers year to year.
Moat- Being the early mover in the online reverse logistics market, LSI has developed a substantial moat, serving 139 of the Fortune 1,000 companies. With 2.2 million registered buyers — a number that has grown at 27% yearly since 2006 — LSI offers any business the best opportunity to unload and profit on returned products, surplus capital, or even leftover scrap.
Unique Niche- Despite allowing consumer buying, LSI largely stays away from the Business to Consumer market and focuses directly upon online wholesaling, carving out what has become its own little niche. With EBay and Amazon.com, Inc. (NASDAQ:AMZN) focused on the online consumer space, Ritchie Bros. Auctioneers (USA) (NYSE:RBA) represents LSI’s most direct competition.
Weaknesses:
Major Contracts- Scrap and Surplus contracts from the DoD accounted for 28 and 13% of LSI’s 1st quarter revenues respectively. Furthermore, contracts with major retailers like Wal-Mart and Target would be hard to replace if they are not maintained.
Negotiations- Despite their growing moat, LSI is fairly dependent upon the DoD, putting them in an unfavorable negotiating position. With their surplus contract expiring in February 2014 and their scrap contract expiring in June 2014, it will remain pivotal for LSI to not only reach a new agreement, but to make it a profitable endeavor.
Opportunities:
Market Opportunity- Holding a $3 billion share of what the company sees as a $150 billion dollar industry, LSI has a large runway to grow organically. With a 2% share in the $50 billion retail industry, a 2% share in the $100 billion capital asset industry, and an 11% share in the public sector, simply expanding upon these numbers would be a growth story in and of itself.
Acquisitions- Acquiring GoIndustry DoveBid and National Electronic Service Association (NESA) in 2012 for $11 million and $18 million respectfully, LSI took major steps towards strengthening its international growth opportunities. As GoIndustry DoveBid offers a move into South America, Europe, and Asia, NESA offers a new growth channel in Canadian electronics.
Mobile- Much like its online business to consumer peer, EBay, LSI is looking towards mobile to fuel future online growth. As average daily mobile visitors has jumped from 5% to 16% in just 2 years, the company is looking to capitalize on further mobile growth with the upcoming creation of its liquidation.com app. Considering EBay’s wild success with its own app — as it sells over 9,000 cars every week on its mobile site — LSI can clearly see the need to create its own app as soon as possible.
Platform Consolidation- By moving their various networks onto one single platform, LSI could not only cross-promote more effectively, but they would be able to streamline their operations on the upcoming mobile app. By simplifying its registered user database, LSI could more effectively promote a wide array of their products, rather than just one network’s niche goods.
Threats:
Amazon.com, Inc. (NASDAQ:AMZN)– In what seems to be the case with nearly every business in operation today, Amazon represents LSI’s most glaring competitive threat. Since the online juggernaut has moved into the supply side of business with the appropriately named Amazon Supply, it is not too hard for one to imagine them jumping into the reverse logistics space as well. Continuing to build upon their warehousing footprint, it wouldn’t take long for Amazon to become a major competitor if they chose to.
EBay Inc (NASDAQ:EBAY)– Not only did EBay unsuccessfully try to enter into the reverse logistics market in 2005, they provide major competition to LSI in the Business to Consumer market. EBay, paired with Amazon, offer an uncomfortable amount of competition versus LSI’s growing Secondipity platform. While the Secondipity business is more focused on bulk and wholesale selling, it ultimately serves as a Business to Consumer outlet, a market that is dominated by Amazon and eBay.
Ritchie Bros. Auctioneers (USA) (NYSE:RBA)– Representing LSI’s most direct competition, Ritchie Bros. is also a wholesaler of many capital products and has recently expanded its internet presence. Going head to head with LSI’s TruckCenter.com business, Ritchie Bros. offers a heavy machinery and trucking focus, a niche LSI has only begun to target. Having acquired TruckCenter.com in 2011 for $9 million in cash, LSI has shown its interest in the space, but will have its work cut out going up against Ritchie Bros.
Valuations
| Company | P/E & FP/E | P/CF | 5 Yr PEG | 5 Yr Rev Growth | 5 Yr EPS Growth | Operating Margin |
| LSI | 25 & 15 | 18 | 0.77 | 15% | 24% | 16% |
| Amazon | NA & 76 | 58 | 4.45 | 34% | NA | 1% |
| eBay | 28 & 18 | 19 | 1.42 | 12% | 40% | 21% |
| Ritchie Bros. | 29 & 23 | 19 | 1.75 | 7% | 0% | 29% |
With eBay and LSI offering the only true EPS growth of the group, they stand out as the two best current investments. Despite Amazon’s 34% revenue growth, they have largely been unable to generate true profit from this growth. With their famously thin margins, Amazon continues its destruction of brick and mortar stores everywhere. However, with the stock near all-time highs, I would rather look at a more traditional investment in either eBay, or “eBay Junior,” LSI.
Holding the lowest P/E and Forward P/E of the group, while also having the lowest PEG — a sign of the company’s vast growth runway — LSI looks to be in a great position to outperform the market over the long-term. As they continue making new acquisitions, looking to expand their footprint globally and operationally, LSI has demonstrated its ability to pick up new market share. Following its acquisition of TruckCenter.com, a move that will help them compete against Ritchie Bros., I am very confident in LSI’s ability to fend off the smaller company.
All in all, with their recent GoIndustry DoveBid acquisition, a sticky business, a strong moat, and a market with immense growth potential, I believe LSI’s Forward P/E of 15 offers investors a tremendous buying opportunity. I truly believe LSI is the next “wholesaling eBay” — a niche home to huge growth potential — and one that the company already has a great head start in.
The article Why This Company Could Be the Next eBay originally appeared on Fool.com and is written by Josh Kohn-Lindquist.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
