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Ravi Ramenani
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My goal is to find companies that can employ large amounts of capital at significantly higher rates of return for longer periods of time trading at a reasonable price. I realized my passion for economics and finance about 6 years ago during a long conversation with a friend about exchange rates... More
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  • LQDT Update.

    After the above article I have got quite a few questions about the future of the company in light of the recent quarterly results and drop in share price. I feel obligated to update on my analysis. I would like to update specifically on the recent conference call and stock compensation issue.

    Q2 2014 results compared to Q2 2013:

    Revenue: $128M (down 1.5%).

    COGS+Profit sharing: 48.7% (3% higher)

    SG&A + Tech = 40.4% (6.5% higher)

    There is no argument that the quarterly results are bad. In particular I am concerned about the increase in COGS. Historically LQDT has been able to increase revenue organically and through acquisitions while maintaining the COGS. LQDT's USP has always been leader in reverse-supply chain industry with first mover advantage in consolidating the industry. I hope this increment in COGS is a glitch in the long-run.

    Incremental investment in technology/Operations ($29M vs $22M) is the major contributor for decline in EBITDA and Net Income. Now investors may have different opinion on whether this is a good investment ie., will bring more revenue in future or a maintenance cost ie., minimum investment required to maintain the current revenue. Based on the management discussion they are investing heavily for the future incremental revenue, time will tell.

    Based on their FY 2014 projections of $1.1 - $1.27/share = ~$37M in net income for FY 2014 and CapEx of $8 gives around $30 - $35M FCF. My guess is $30M FCF will be LQDT's lowest FCF increasing from here.

    At $13.9/share = $450M - $102 (cash) = $350M it is a very good investment for the current price. I agree that from the time I wrote article costs have increased, but I believe over the long run of 2 - 3 years LQDT will be a good investment even at $19/share.

    2013 Executive's compensation:

    Base Salary: $1.8M

    Bonus: $0.76M

    Restricted Stock: $6.4M

    Options: $1.6M

    Total: $10.5M









    Base Salary














    Restricted Stock





















    Restricted stock and option values are fair values calculated based on RFR, volatility and exercise timeline. As you can see from the above table half of $8M from stock-based compensation in 2013 was deemed useless at the current stock price. Most of the options are underwater and fair value of restricted stock is ~$3M.

    Still, stock-based compensation of ~$3.5M/quarter is high and the question of how to look at $3.5M/quarter is up for an argument. Since it is the fair value and not the current value depending on the stock price movement, it becomes close to $0 as stock price go down and moves higher on the other side. In any which way the number is quite high and I am hoping there would be no bonus and ratification of stock-based compensation for FY 2015.

    Disclosure: I am long LQDT.

    Tags: LQDT
    May 17 2:42 PM | Link | Comment!
  • CVA And WM Update

    This is a follow up article to :

    WM released their 10K today (02-18-2014) and it sheds some light into some of the difficulties of Waste-to-Energy business. They took an impairment of ~$625M in their waste-to-energy unit. As an investor in CVA, the largest waste-to-energy company, I would like to understand if the problem is in the sector or business model.

    For starters, Wheelabrator, waste-to-energy unit of Waste Management, was acquired in 1990 and WM increased it's capacity all through 90's and it has hit a snag in 2000's. From 2003 to 2013 amount of waste processed was stagnant at 21,000 tons-per-day (tpd) and operating income decreased from $220M to $100.

    Reasons for the latest impairment are:

    1) Lower available waste to process

    2) Increased maintenance as the facilities get old

    3) Lower expected energy prices due to natural gas and

    4) Availability of other processing facilities.

    Now comparing these issues to CVA

    1) CVA runs ~56% of their capacity under put-or-pay model with municipalities who are obligated for ~20 years

    2) CVA has also talked about the increased maintenance of their facilities

    3) CVA enjoyed higher energy price contracts in the past which are coming due and could affect their future income

    4) WM is reviewing to close down few facilities which could be a big win CVA in those areas.

    One the whole, this shows how waste-to-energy management could be a tough business with CVA could be emerging as a winner.

    Disclosure: I am long CVA.

    Tags: CVA, WM
    Feb 18 11:40 PM | Link | 1 Comment
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