Alan Brochstein Looks at Five Companies Who May Be Leading the Move to Online Auctions

It's a new year, so it's the time when people like to make predictions for the coming year. The analysts on Wall Street are sharing their forecasts for the S&P 500, while the economists are guessing how much growth we will have (or not!). Some predictions are more difficult than others, and no one has a crystal ball. Here's a prediction you can likely count on: The Internet will keep growing.

You probably accept this prediction as fairly likely to materialize. While there are lots of direct ways to invest in this theme, like perhaps Google (GOOG), which I shared as an "undervalued growth stock" in late 2011, or maybe a company like Akamai (AKAM), it's the less obvious investments that are likely to be the most rewarding. One industry that I think could benefit from the continued growth in the Internet is online auction providers. These companies, which I will describe below, are using the Internet to bring buyers to sellers of mainly used goods. While auctions have been around for a long time, they have historically been local. The ability to bring a broader universe of buyers is of high value to potential sellers. This is an excellent example of the Internet changing business practices.

Here is a list of companies that I believe may be benefiting from the growth in online auctions:
 


As always, remember that these aren’t recommendations. I have included companies with market capitalization in excess of $500mm, but the list may not be complete.

The group has performed well over the past year as well as the past five years, with only one decliner in 2012, one that came close to matching the S&P 500 and three that gained 23-68%. Over the past five years, one stock hasn't traded publicly and one has declined, but the other three have risen substantially despite a small market decline.

I have included a column for net debt to capital, and three of the five have little or no net debt, while one is relatively high at 51%. I also included some long-term sales and earnings growth data, suggesting reasonable growth

Finally, in the last two columns, we see that the PE ratios are a premium to the market, but they are in line with or below their 10-year medians. Also, note that the range of PE ratios is 17-22, similar to the one-year EPS growth rates.

eBAY (EBAY) is the best known auction site, but the biggest driver of its stock may actually be its Paypal unit. This stock is much, much larger than the rest. It's a market leader and could be interesting as an investment. I also think that it could potentially acquire one of the other companies.

Copart (CPRT) and Kar Auction (KAR) both enable insurance companies to dispose of cars that have been totaled. CPRT has more recently gone direct to consumers looking to sell their used cars. The company recently entered several different foreign markets. The management team here has substantial insider ownership and takes a very long-term view towards the business, which I believe is a positive.

Ritchie Brothers (RBA), which is based in Canada, has been the obvious weak performer. The company had a very strong record of growth prior to 2007, but the Great Recession weighed on its results. RBA hosts huge physical auctions at 44 different sites around the world, many with unreserved prices, and had 4.1mm different bidders in the first three quarters of the year. It has 110 locations in 25 countries and specializes in massive machinery and equipment for the transportation, agricultural, mining and other industries.

Liquidity Services (LQDT) is one I have followed closely for more than a year. The company helps the government get rid of surplus items, and it also caters to retailers looking to dispose of returned merchandise. More recently, it entered the market for helping Fortune 1000 companies rid themselves of unused assets after completing an acquisition. The company auctioned $864mm of merchandise in the fiscal year ending in September. In addition to a strong balance sheet, insiders have substantial ownership.

So, hopefully I have given a theme to consider and enough information to begin your own investigation to identify risks and potential opportunities.


Regards,

Alan Brochstein
Founder, Invest By Model and AB Analytical Services
TradeKing All-Star Commentator

Disclosure:  Long LQDT in one or more models managed by the author at Invest By Model

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