Why Liquidity Services' Earnings Won't Be That Bad

| About: Liquidity Services, (LQDT)

Liquidity Services Inc. (NASDAQ:LQDT) is set to report FQ1 2014 earnings before the market opens on Friday, February 7th. Liquidity Services is a surplus asset management firm that helps businesses and government clients find buyers or solutions for surplus or obsolete inventory. Profit and sales have both declined in the past year and an important 10 month contract extension with the US Department of Defense was announced in January. While the contract extension will not have a material impact on Liquidity Services' quarterly results, it's an encouraging indicator of the strength of service that the company may be able to provide to clients in the near future. Here's how investors expect Liquidity Services to report this quarter.

The information below is derived from data submitted to the Estimize.com platform by a set of Buy Side and Independent analyst contributors.

(Click Here to see All Estimates for Liquidity Services)

The current Wall Street consensus expectation is for LQDT to report 22 cents EPS and $110.83M revenue while the current Estimize.com consensus from Buy Side and Independent contributing analysts is 26 cents EPS and $114.68M revenue. This quarter the buy-side as represented by the Estimize.com community is expecting LQDT to beat the Wall Street consensus on both profit and revenue by a considerable margin.

Over the previous five quarters for which there is sufficient data the consensus from Estimize.com has been more accurate than Wall Street in forecasting LQDT's EPS and revenue 3 and 2 times respectively. By tapping into a wider range of contributors including hedge-fund analysts, asset managers, independent research shops, students and non professional investors Estimize has created a data set that is up to 69.5% more accurate than Wall Street, but more importantly it does a better job of representing the market's actual expectations. It has been confirmed by an independent academic study from Rice University that stock prices tend to react with a more strongly associated degree to the expectation benchmark from Estimize than from the Wall Street consensus.

The magnitude of the difference between the Wall Street and Estimize consensus numbers often identifies opportunities to take advantage of expectations that may not have been priced into the market. In this case we are seeing a larger differential compared to previous quarters.

The distribution of estimates published by analysts on the Estimize.com platform range from 24 cents to 29 cents EPS and $112.15M to $121.83M in revenues. This quarter we're seeing a larger distribution of estimates compared to other quarters, especially on revenue.

The size of the distribution of estimates relative to previous quarters often signals whether or not the market is confident that it has priced in the expected earnings already. A wider distribution of estimates signals less agreement in the market, which could mean more volatility post earnings.

Throughout the quarter the EPS estimate from Wall Street decreased from 47 cents to 22 cents while the Estimize consensus remained flat at 26 cents. Wall Street also lowered its revenue expectation from $115.48M to $110.83M while the Estimize forecast dropped from $115.46M to $114.68M. Timeliness is correlated with accuracy and falling analyst expectations at the end of the quarter are often a bearish indicator. However, this quarter even after declining the Estimize community revenue consensus is still well above Wall Street's forecast.

The analyst with the highest estimate confidence rating this quarter is BB9166 who projects 26 cents EPS and $112.40M in revenue. In the Winter 2014 season BB9166 rated as the 23rd best analyst and is ranked 59th overall among over 3,750 contributing analysts. Estimate confidence ratings are calculated through algorithms developed by deep quantitative research which looks at correlations between analyst track records and tendencies as they relate to future accuracy. In this case BB9166 is expecting Liquidity Services to report in-line with Estimize consensus on EPS but report between Wall Street and Estimize on revenue.

Although Liquidity Services has been in decline over the past year, contributing analysts on the Estiimze.com platform are expecting the company to outperform the Wall Street consensus this quarter. The 10 month contract extension with the US Department of Defense is an encouraging sign that LQDT can stay competitive and investors are expecting this quarter's report to be better than previously anticipated.

Disclosure: None.

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Tagged: , Internet Software & Services, Earnings
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