Sector Watch: Auction websites
Going, going gone are the glory days of old-fashioned, in-person auctions, left largely now to the nostalgic at heart. These days the Internet, and more notably auction sites Liquidity Services, Inc. (Nasdaq:LQDT) and Overstock.com (Nasdaq:OSTK), have emerged as critical business tools for professional buyers of wholesale, surplus and salvage assets.
It’s estimated that the online auction market will exceed $63.1 billion this year, from $38.5 billion in 2004 — perfect timing for Liquidity Services to cash in on the growth.
The company is an operator of online auctions where professional buyers can bid on wholesale, surplus and salvage assets. Approximately 500 product categories are listed on the company’s automated online marketplace, including consumer electronics, general merchandise, apparel, scientific equipment, aerospace parts and equipment, technology hardware and specialty equipment.
The company also owns the Liquidation.com auction site (where government agencies sell wholesale, surplus and salvage assets), the Govliquidation.com site (where federal government surplus and scrap assets are sold), and the Liqidbiz.com site (where European companies sell goods to international buyers). In addition, Liquidity Services operates a wholesale portal, Govwholesale.com, connecting advertisers with buyers seeking products for resale.
Liquidity Services’ online auction sites are supported by its marketing, merchandising, fulfillment, payment, collection, dispute mediation and logistics management services. The company also helps sellers prepare sales information, warehouse merchandise and settle and report transactions.
At year-end 2007, Liquidity Services had 724,000 registered buyers, up from 565,000 registered buyers one year earlier. The number of auction participants rose to a record 323,000 in December versus 247,000 participants one year ago, and the number of completed transactions rose to a record 63,000 from 49,000 a year earlier.
Liquidity Services serves commercial, international and government customers. Approximately half of the company’s revenues are derived from two large Department of Defense contracts for sales of surplus and scrap metal.
Following 34% revenue growth and 36% per-share earnings growth in FY 2007, Liquidity Services posted 31% year-over-year revenue growth in the first quarter of FY 2008 to $59.3 million from $45.2 million and 27% growth in adjusted EBITDA to $5.2 million from $4.1 million. Adjusted net earnings (excluding stock-based compensation) rose 19% in the first quarter of FY 2008 to $3 million, or $0.11 per share, from $2.5 million, or $0.09 per share, one year ago. Merchandise sales volume for the company’s auction sites reached a record $67.6 million in the first quarter of FY 2008 and was up 27% on a year-over-year basis.
Liquidity Services is forecasting full-year FY 2008 merchandise volume exceeding $320 million ($80 million per quarter) and looks for FY 2008 adjusted per-share earnings of between $0.51 and $0.53, up 19-plus percent from adjusted per-share earnings of $0.43 in FY 2007. Analysts think this company can post 26% average annual growth over the next five years. My $12 price target for Liquidity Services is above Tuesday’s closing price of $8.28.
While Liquidity Services primarily dabbles in auctions, Overstock.com, Inc. operates both as an as an online retailer and an auction site. In retail, it offers discount brand name merchandise for sale, including bed and bath goods, home décor, kitchenware, watches, jewelry, computers and other electronics, sporting good, apparel, books, CDs, DVDs and video games. In its auction sector, professional buyers can scour the site for bargains, and sellers can rely on the online marketplace as an inventory liquidation channel.
Overstock.com was recently ranked the number two retailer overall and the number one retailer among mass merchants in a 2007 online survey by the Customer Respect Group. In addition, the NRF Foundation/American Express Customer Service Survey, a national survey polling thousands of households, ranked Overstock.com among the nation’s top five retailers for the second consecutive year.
Overstock.com began a profitability turnaround in 2007. While the company’s revenues were modestly lower at $768.8 million in 2007 versus $788.2 in 2006, gross profits improved 36% year-over-year to $128.9 million from $94.8 million, contribution margins (gross profits less marketing costs) more than doubled to $73.3 million from $23.9 million, and operating cash flow rose by $36.4 million to $10.1 million from a $26.3 million cash flow deficit in 2006. In addition, net losses declined 57% year-over-year to $44.1 million, or $1.86 per share, in 2007 from $101.8 million, or $5.01 per share, in 2006. Excluding restructuring charges and discontinued operations, net losses totaled $27.9 million in 2007 and $89.2 million in 2006.
In 2008, Overstock.com plans to focus on reviving revenue growth while maintaining cost controls that fueled 2007 margins gains. Analysts predict Overstock.com will produce 20% average annual growth over the next five years. My $13 price target for Overstock.com (OSTK) is above the company’s closing price of $10.36 on Tuesday.
