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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
  • LQDT Update. 0 comments
    May 17, 2014 2:42 PM | about stocks: LQDT

    seekingalpha.com/article/2142233-liquidi...

    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

     

    CEO

    CFO

    CIO

    COO

    EVP

     
          

    Total

    Base Salary

    600,000

    321,000

    271,000

    306,000

    301,000

    1,799,000

    Bonus

    256,000

    108,000

    180,000

    131,000

    84,000

    759,000

    Restricted Stock

    720,000

    1,581,000

    3,254,000

    623,500

    243,000

    6,421,500

    Options

    433,000

    1,031,000

    0

    135,500

    60,361

    1,659,861

    Total

    2,009,000

    3,041,000

    3,705,000

    1,196,000

    688,361

     

    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.

    Stocks: LQDT
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