MCINTIRE INVESTMENT INSTITUTE - Gateway...Marketplace LQDT’s Government Liquidation LONG-TERM...
Transcript of MCINTIRE INVESTMENT INSTITUTE - Gateway...Marketplace LQDT’s Government Liquidation LONG-TERM...
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MCINTIRE INVESTMENT INSTITUTEAT THE UNIVERSITY OF VIRGINIA
(NASDAQ: LQDT)
Prepared by H. Masood, R. Rechkemmer, and J. Wulkan| Oct. 27, 2012
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AGENDA
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Recommendation
Business Overview
Market Misperceptions
Valuation
Catalysts
Conclusion
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RECOMMENDATION
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Strong growth will continue as company gains critical mass
Price Target: $64.16Upside: 63.4%
Misperception 1: DoD business on the decline
Catalyst 2: Earnings beats driven by network effect and acquisition synergies
Misperception 2: Viable competition in commercial sector
Catalyst 1: Favorable renewal of DoD contracts
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BUSINESS OVERVIEW
Differentiated e-commerce auction marketplace for wholesale surplus and salvage assets
Integrated value-added services for a single offering that manages clients’ reverse supply chain
U.S. Retail Global CapitalAssets
U.S. Public Sector
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FINANCIAL OVERVIEW
Price: $39.27 Avg Vol (3m): 715,584 ROE (ttm): 25.77%
Market Cap: $1.22B P/E (ttm): 25.70x Operating Margin: 18.3%
52w Range: $26.39 – 66.57 PEG: 0.74x Debt/Equity: 0.18x
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REVERSE SUPPLY CHAIN
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SEGMENTAL BREAKDOWN
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40.7%
55.8%
3.5%Revenue Breakdown
Commercial DoD State/Local
45.8%33.9%
20.3%
GMV Breakdown
Commercial DoD State/Local
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MARKET POSITION
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MISPERCEPTION 1: DOD BUSINESS ON THE DECLINE
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1. CEO announced stock sale plan2. Off Wall Street:
a. DoD contract renewal in doubtb. Unfavorable terms in potential new contract
3. DoD September liquidations lighter than expected4. Bank of America downgrade from $62 to $46
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STRONG DOD CONTRACT PERFORMANCE
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• LQDT has effectively executed DoD contract for 11 years• Received Vendor Excellence Award from DLA for last two
years• Past contract renegotiations have led to better terms for
LQDTDoD abandoned consignment model for purchase model,
thus sacrificing economic benefit for ease of business
VAR: “We have moved to a purchase model from a consignment model even though it added greater economic recovery because of the purchase model’s ease” – Ken Macnavin (DLA Public Relations)
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BEST POSITIONED TO MEET BID CRITERIA
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Keys to the Bid (Least to Most Important):• Logistics: Other companies can perform this• Liquid marketplace: Hard for competitors to replicate without
strong network base• Compliance: Stringent DoD requirements make this difficult
to replicate
VAR:“If we fail to meet compliance on one item, we have to pay half the item’s value to the DoD… imagine how much we would have to pay on a jet. Therefore, compliance is definitely the hardest part of a DoD bid. We have had a compliance error rate of 0% over the last 11 years” – Julie Davis (LQDT Investor Relations)
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MARKET STRESSES COMPETITION FROM GENCO
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Genco Overview:• Market’s favored competitor for 2014 DoD contract• Claim to be the world’s largest provider of reverse logistics
services
Concerns are Unsubstantiated:• Genco focuses on consumer goods, not large capital assets• Genco has no history of compliance with DoD• LQDT operates 150 warehouses on US Military bases to
support operations
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GENCO VS GOVLIQUIDATION SNAPSHOT
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GencoMarketplace
LQDT’s Government Liquidation
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LONG-TERM SECULAR GROWTH DRIVERS FOR DOD BUSINESS
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Minimum of $500 billion in DoD
budget cuts over next 10 years
Revenues have always fluctuated quarter to quarter due to nature of
business
Revenues have always fluctuated quarter to quarter due to nature of
business
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ISPERCEPTION 2: VIABLE COMPETITION IN COMMERCIAL SECTOR
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LQDT HAS A SUSTAINABLE COMPETITIVE ADVANTAGE
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High Barriers to Entry:• Logistical requirements make industry capital intensive• Buyer and seller network effects create liquid markets
eBay’s Past Failures:• 2005: eBay attempted to enter wholesale auction marketplace• 2009: eBay exited industry, worked closely with LQDT• Justification: hands-off marketplace• LQDT is eroding eBay’s B2B business by acquiring its
power sellers
Ritchie Bros. Auctioneers:• VAR: Ritchie Bros expressed no interest in building
extensive online business – RBA Investor Relations
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HUGE UNTAPPED MARKET POTENTIAL
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REALITY: STRONG GROWTH WILL CONTINUE
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0
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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Adju
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TDA
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$M
Total Revenues
Gross Merchandise Volume
Adjusted EBITDA
GMV:31.1% CAGR
Revenue:25.4% CAGR
Adj. EBITDA:
40.3% CAGR
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TAILWINDS FOR DOD BUSINESS
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• $500B budget cut already announced, with possibility for $500B more in 2013
• Transition from manned to unmanned wars results in widespread equipment obsolescence.
• Surplus assets from ending military operations in Iraq will boost LQDT business
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COMMERCIAL BUSINESS GAINING CRITICAL MASS
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• Fortune 500 companies are just learning how to extract value from the reverse supply chain
• Environmental regulations mandate the use of proper capital asset disposal services
• Strategic accretive acquisitions (e.g. Jacobs Trading) add substantial value to LQDT and cut costs through operational synergies
• Growth in e-commerce will drive expansion of retail liquidation business
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VALUATION MODELS PREDICT OUTPERFORMANCE
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Multiple Methodologies:
• Revenue Build• Discounted Cash Flow
Analysis• Sensitivity Analysis• Historical Comparables
Valuation• Triangulation
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SEGMENTAL REVENUE BUILD
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DCF ANALYSIS PROMISES UPSIDE
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DCF SENSITIVITY ANALYSIS SHOWS FLEXIBILITY
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HISTORICAL COMPARABLES ANALYSIS COMPLETES PICTURE
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LQDT IS UNDERVALUED RELATIVE TO HISTORICAL COMPS
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Current PriceCurrent Price
UpsideHigh: 192.8%
Average: 88.3%
Low: -16.3%
Price as of 10/22/12:
$39.27
Average Implied Value:
$73.93
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TRIANGULATED VALUE INDICATES 63.4% UPSIDE
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RICE PROJECTION MAKES LQDT AN ATTRACTIVE INVESTMENT
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CATALYSTS: HOW PERCEPTIONS WILL CONVERGE
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1) DoD Renews Contract with LQDT in FY13:• Negligible chance of contract renewal failure• New contract terms will likely be favorable for LQDT
2) Beats Earnings in 2H13:• Market expectations shift after 4Q12, making beats
easier• Consistently conservative guidance• Network effect and untapped value of reverse supply
chain becoming increasingly apparent• Goindustry Dovebid synergies lead to operating margin
expansion
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RECOMMENDATION
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Strong growth will continue as company gains critical mass
Price Target: $64.16Upside: 63.4%
Misperception 1: DoD business on the decline
Catalyst 2: Earnings beats driven by network effect and acquisition synergies
Misperception 2: Viable competition in commercial sector
Catalyst 1: Favorable renewal of DoD contracts
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APPENDIX
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Blue Chip Client BaseRevenue Build
Overall and CommercialState and Local GovernmentDepartment of Defense
Discounted Cash Flow AnalysisLine ItemsAssumptions
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APPENDIX: BLUE CHIP CLIENT BASE
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APPENDIX: REVENUE BUILD - OVERALL AND COMMERCIAL
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APPENDIX: REVENUE BUILD - STATE AND LOCAL GOVERNMENT
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APPENDIX: REVENUE BUILD - DEPARTMENT OF DEFENSE
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APPENDIX: LINE ITEMS
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APPENDIX: ASSUMPTIONS
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