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The Overview

Liquidity Services Inc. (NASDAQ:LQDT) is an extremely unique services company that has seen its stock price soar to new heights, culminating in a gain of 159.3% over the last year. Liquidity Services has received increasing investment exposure, with mutual fund ownership of LQDT rising the past eight quarters, from 108 in December 2009 to 278 in September 2011. In early November, the company was named to Forbes List of 100 Best Small Companies in America for the fourth consecutive year, and it is poised to continue this streak of prosperity well into 2012.

The Niche

Liquidity Services operates several online auction marketplaces for surplus and salvage assets and provides its services to government entities as well as businesses. In fact, its online auction marketplaces are used by thousands of government agencies, and LQDT differentiates itself from fellow online vendors such as eBay (NASDAQ:EBAY) and Amazon (NASDAQ:AMZN) by specifically targeting the wholesale sector. Liquidity Services does not directly compete with either of the aforementioned companies; instead, these companies provide consumer demand for sellers that usually get their wholesale items from Liquidity Services.

As IBD notes, Liquidity Services connects its extensive seller network to buyers such as e-businesses operating on eBay. In fact, Liquidity Services has little to no direct competition, and as a result, it is able to dominate its niche. It also has established an extensive clientele base and has aggressively courted potential sellers; Liquidity Services is the main liquidator for the U.S. Department of Defense, boasts more than 1.6 million registered buyers, 4,000 selling clients, and a presence in 116 countries. As its Seeking Alpha company description notes:

While a well-established forward supply chain exists for the procurement of assets, most manufacturers, retailers, corporations and government agencies have not made significant investments in their reverse supply chain process or systems.

Liquidity Services is able to benefit by addressing this issue and providing government and corporate entities with a fast and easy way to liquidate unused or unwanted assets. However, Liquidity Services is not content with simply resting on its laurels; it has continually pushed for aggressive expansion. Its most recent acquisition was in October, when it acquired Jacobs Trading Co., which helps companies such as Wal-Mart unload excess inventory. This acquisition is expected to greatly benefit Liquidity Service's bottom line and increase its customer base. Liquidity Services is also benefiting from the current economic climate and consumer uncertainty, factors which have often left companies and governments with no choice but to empty excess inventory in a fast and efficient manner. Overall, Liquidity Services occupies a very unique niche in the Services sector that is benefiting not only from its wide deal network and aggressive expansion, but also from fellow online retailers and the current economic tides.

The Result

Liquidity Services has experienced positive growth, albeit growth that has recently weathered some turbulence. It recently missed the consensus EPS analyst estimate by $0.05 in the fiscal 4th quarter and adopted a cautious tone for the fiscal year of 2012, citing volatility in the macro-environment. However, it still set an EPS estimate for fiscal 2012 between $1.26 and $1.32, significantly higher than the analyst consensus of $1.13. Liquidity Services’ 4Q report also showed a 79% increase in EPS year-over-year and a 31.6% earnings surprise on better than expected revenue of $80.7 million, an increase of 11% year over year. Liquidity Services also boasts average EPS growth of 103% over the last three quarters and a 3 Year EPS growth rate of 58%. Although the company’s most recent EPS numbers were somewhat mediocre, Liquidity Services CEO Bill Angrick notes that the fiscal 4th quarter is usually a "seasonally low quarter for the company."

Overall, 2011 has been an excellent year for Liquidity Services and its operations. For fiscal 2011, it reported record consolidated revenue figures of $337.4 million, an increase of approximately 18% from the prior year, as well as a 41% increase in adjusted EBITDA to $52.7 million. The total sales volume of all merchandise sold through the company's marketplaces, was a record $558.5 million, an increase of approximately 30% from the prior year. From an annual perspective, Liquidity Services has had a 3-Year EPS growth rate of 58% and 2 consecutive years of annual EPS growth. Liquidity Services has a high annual ROE of 31.2% as well as an annual Pre-Tax Margin of 21.2%. These numbers allow a glimpse into the solid profitability of the company. Furthermore, it has no debt and positive, although not spectacular, sales growth; its 3-Year Sales Growth Rate is a steady 9% while sales in 2011 4Q constituted a 13% increase year over year.

The Verdict

Although Liquidity Services did fall short in its 4Q EPS, the other 4Q figures showed significantly positive growth, and Liquidity Services had an absolutely stellar 2011 fiscal year. Its 4Q transcript can be found here. Moreover, Liquidity Services benefits from the relative obscurity of its niche and has few direct competitors, which allows it to fully capitalize on the profitability of the online wholesale inventory liquidation market. Liquidity Services is definitely an attractive momentum/growth play that has huge potential.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LQDT over the next 72 hours.

Source: Liquidity Services: A Growth Perspective