One promotional company here...I think its due for a fall! Have you come across this?
Bottom line: Based on the very limited information released by this shady company, it is expensive and over-levered. By my calculations, Live Ventures is currently trading at 30X 2017E EPS. It carries a Debt/EBITDA ratio of over 6X. The overly promotional management team is pumping this stock to the sky, which has led to an extraordinary increase in market cap. Short the stock!
First the business description:
"Live Ventures Incorporated, formerly LiveDeal, Inc., is a holding company. The Company offers LiveDeal.com, a real-time deal engine that connects restaurants across the United States and consumers via a platform. The Company operates in three segments: legacy merchant's services; online marketplace platform, and manufacturing. The legacy merchants' services segment consists of local exchange carrier (LEC) and Velocity Local. The online marketplace platform segment consists of LiveDeal.com and various consumer products entities. The manufacturing segment includes the operations of Marquis Industries, Inc. (Marquis Industries). Marquis Industries is a carpet manufacturer and a manufacturer of yarn products, as well as a reseller of hard surface flooring products. LiveDeal.com provides marketing solutions to restaurants to boost customer awareness and merchant visibility on the Internet."
Okay, so that's the Google Finance description. Here is their description from their IR website:
/"Live Ventures is a Diversified Growth Holding Company with a strategic focus on acquiring United States based middle market growth manufacturing and value-add distribution companies."
So they have changed their business to a value investment firm. That should raise eyebrows already, but if it doesn't, then there's more color they would like to provide you.
More:
"Live Ventures Incorporated is a NASDAQ publicly traded company formerly known as LiveDeal, Inc. In the fourth quarter of 2011 the company was saved from delisting by activist investor Jon Isaac after he took action to shore up the balance sheet with an investment. Jon Isaac became the CEO of the company in 2012, with the goal to restructure and rebuild the company. Live Ventures Incorporated was founded in 2015 with a sole mission to deliver shareholder value through the acquisition of profitable and growing companies only. We invest in value. Live Ventures distinguishes itself from competitors by its rigorous business model, extensive deal sourcing process and disciplined investment criteria."
Their website lists their criteria for making acquisitions (this is pretty funny now):
"Investment Criteria ·
We seek to make control only investments in mature companies in growing industries. We look for a solid history of profitability and a proven management team. Our target company has $40 million to $250 million in sales and $5 million to $15 million in cash flow. This particular segment of the market gives us a competitive advantage in terms of valuations. Our current strategic focus is on the manufacturing and value-add distribution space. We are sector agnostic and look to diversify our portfolio of subsidiaries. We buy companies with outstanding management teams who have a track record of realizing value and consistent cash-flows year in and year out. Since we are not a traditional Private Equity Fund we do not "flip" companies to another buyer in 3-5 years; instead we hold value indefinitely and help our companies grow organically and or through acquisitions. Live Ventures targets a minimum of 25% yearly IRR."
Here is a snapshot of their website, where you can fill out of a form if you want to sell your company!!! This is pretty comical!!
The stock has gone bananas recently due to an acquisition and some very promotional and incomplete press releases by the company.
The press releases are comical. They are excessively promotional and I would not be surprised if the SEC came in to censure these guys.
The press releases are for public viewing. But there are so many questions on their recent acquisition. What are the terms of the acquisition? What is the cost of funding? What are the financials of the acquired business and what are the growth prospects? None of that information is available.
Here is the press release from this morning:
"Reporting its most successful year in the Company’s history, Live Ventures reported a record $79M in revenues, an increase of 136 percent over the previous year, and net profit of approximately $17.82M, representing earnings per share (EPS) of $8.92."
That $8.92 EPS includes a huge tax benefit which they failed to mention in that press release. Here is what they said in their press release:
"Outlook for 2017: The Company expects multiple factors to impact growth 2017. Management anticipates revenues to increase by well over 50 percent, easily surpassing $120M, and stockholders’ equity to grow at a high double-digit rate. In addition, since the acquisition of Vintage Stock closed several weeks after our fiscal year end, none of the results from Vintage Stock is included in this financial report, all of which will figure prominently into the Company’s upcoming 10Q filing and future financial results."
Okay, so here is what we know about 2017.
1) Revenues will surpass $120MM
3) Live Ventures provided us with the following profitability information:
"As a result of this highly accretive acquisition, management expects Live Ventures' assets to increase to over $100M, annual sales to increase to $160M and net income to increase to $20M ($1.21 per share)."
4) Current market cap is $88.6MM
Leverage: Based on what we know, the EV of Live Ventures is hitting close to $160MM. It is hard to say what EBITDA will be, but assuming 10% EBITDA margins (Gamestop has around 9%), we have EBITDA hitting around $12MM. So EV/EBITDA is clocking in around 13X. Debt/EBITDA comes in (optimistically) around 6X, which is really high.
Valuation: Debt will clock in around $80MM for these guys. At 5%, their interest expense will be around $4MM. So if Revenues clock in at $120MM for 2017, EBITDA margins hit around 10%, we have $12MM EBITDA. Assuming 5% depreciation on their $100MM of assets (20 year straight line), we have roughly $5MM of D&A charges. So net income could be around $12MM less $5MM less $4MM, so net income in 2017 could come in around $3MM. S/O at 3.2MM, stock price $27.68, Market Cap stands around $88.6MM. So 2017 P/E stands around 30X. That's expensive, esp. given that Vintage Stock is an entertainment retailer that no one would buy at 30X!!
Of course, we have no idea what margins or growth prospects are for this business. I am skeptical that the financing for this was cheap. I am also skeptical that they paid a good price for it, given the low quality nature of the business and high CAPEX needs. I could be wrong, but I think this makes for a good short (either now or sometime in the future if the market takes it higher). As a longer term consideration, it is not easy to create value in public markets through acquisitions. I think Live Ventures will show this to be the case, as many
UPDATE:
So my original analysis was broadly right. I calculated their net income for 2016 at $3MM. At $30 Stock Price, their market cap was $100MM, which put their P/E at over 30X.
When I revise my numbers based on their latest 10K, I get a 2016 net income number of $3.9MM. Which means at $30, their P/E was 26X, still expensive.
But I am wrong about being short this stock. The reason is because one of their segments (Marketplace) showed an operating loss of $5.1MM. They are shutting this down, which means their net income could jump to close to $9MM. In that case, the stock is somewhat fairly valued at $30.
DETAILED CALCULATIONS OF 2016 EARNINGS
Here are my calculations based on their newly released 10K:
- Vintage Stock Inc. did $12.2MM net income in 2015.
- Manufacturing + Services did $7.5MM in operating income in 2016, which is a full year of operations since they acquired Marquis. Depreciation expense in their manufacturing business ran at around $2.84MM. Not sure how actual compares to this number, but let's take that at face value.
- Marketplace platform showed $5.1MM of operating losses in 2016.
- Interest expense on their Vintage acquisition loans comes to around $6.75MM per year. Let's assume interest expense on their current $15.9MM clocks in around 7.7% (based on their debt table in the 10K), so about $1.2MM. This is way lower than their actual 2016 interest expense of $4MM, but let's not try to reconcile for now.
Bottom line net income 2016 = $12.2 + $7.5 - $5.1 - $6.75 - $1.2 - $2.8 = $3.9MM.
Bottom line net income 2016 (ex. Marketplace) = $12.2 + $7.5 - $6.75 - $1.2 - $2.8 = $9MM.
S/O around 3.3MM, so market cap at $23.92 stands around $79MM. So forward P/E stands around 9X if you exclude Marketplace losses, which I believe they are in the process of shutting down.
This business is hugely affected by macro economic conditions and now by ride sharing services like Uber. So, as an investor, you are investing hoping interest rates, economic conditions, tourism and travel hold up.
Management does have control over the FLEET. This is a consolidated industry with only two major players left in the U.S. market. So it is unlikely management will go nuts trying to get market share by undercutting competition on price.
The operational side of the business is measured in terms of a few metrics: Revenues, Direct vehicle expenses, Depreciation, Transaction days, Revenue per transaction day, average vehicles, size of fleet, program vehicles vs. non-program vehicles.
To get a sense of the business all these things matter. So you can't control macro (economy, interest rates, technology) but the core business performance can be measured. Let's look at Q3 results, which resulted in a huge sell off. The main culprit here was an increase to depreciation expense, due to falling used car prices. As an investor, you can not do anything about this. But it hits Hertz since most of the vehicles in the fleet are non-program cars (92% according to the latest report, down sharply from 28% a year ago) and this comes straight out of profits. The important thing to remember is that used car prices will fluctuate and ultimately come back up if they fall too much. But that's not a good game to play - too macro and unpredictable.
The operating metrics for the quarter aren't bad per say. The fleet size has not shrunk but it isn't growing rapidly either, transaction days are up so demand is still there, RPD is down but only so slightly. Vehicle utilization rates are hovering near 80%, which is decent.
Given how much the stock has fallen, one thing is clear. The net profitability of this business is hugely variable and almost all the variables are correlated. In other words, the 80% drop in stock price shouldn't surprise you, nor would a 5X rise from here in a few short months.
Cutting fleet size to reduce expenses will hit revenues assuming it also results in lower transaction days. It might result in lower net income, but if the reduction in fleet size is accompanied by rising rental rates, it might actually INCREASE net income. So the business would become MORE valuable on lower revenues.