I’ll start this piece off with a bit of a warning. For those that aren’t a fan of illiquid, micro cap stocks with little coverage, now is your chance to hit the escape button and save yourself some time. But you might be thinking, “Yeah, I’m not a huge fan of illiquid stocks, but it can’t be that illiquid.” I’m afraid that yes, it really is that illiquid. Average trading volume is around 17,000 shares. For those with smaller accounts, rejoice. For those with larger accounts, prepare to make your market.
However, if you can overlook the liquidity factor, Live Ventures (LIVE) is a tremendous business with stellar management that has hypodermic levels of skin in the game. Since new management took over in 2011, the company’s book vale per share has grown from $0.29 to $14.97 (as of Q1 2017). That’s a compounded annual return of around 120%. Not bad, not bad at all. Since that same time frame, the company’s assets have grown from $2.8MM to over $25MM. The company has an ROE of 21%, ROC of 35%, and a 3-year Revenue Growth Rate of 125%. It’s trading at a 25% discount to book value, 4.35x its operating cash flow, and a 40% discount to its revenues. The company buys back 6.3x more shares than it issues, and its CEO Jon Isaac owns upwards of 40% of the company himself, with management’s total ownership into the 70% range.
Business Deep Dive / History
Live Ventures started out as the company that migrated Yellow Pages to the internet back in 1994. The company, then named YP.com, was sold to AT&T in 2008 and was re-branded into Live Deal, Inc. Live Deal, Inc. specialized in SMB marketing solutions. In 2011 Jon Isaac took control of the company as it was on the brink of bankruptcy / de-listing from the NASDAQ. Through his company Isaac Capital Group, Jon poured his own capital into the venture and changed everything; thus creating Live Ventures, Inc.
Live Ventures business model is simple, and yes, Buffett-Like. The company is committed to acquiring, “profitable companies in various industries that have demonstrated a strong history of earnings power.” With this in mind, the company looks deeper for businesses with strong management teams, predictable cash flows, and scalable business models. The company executed on its new mission statement for the first time in 2015 with its acquisition of Marquis Industries, Inc, an industry leading carpet manufacturing business. A year later, the company bought Vintage Stock, Inc, an industry leading specialty entertainment retailer.
Three Business Operating Segments
The company has three business segments: Vintage Stock Operations, Marquis Industries Operations, and Legacy Businesses. Let’s break down each business segment into a bit more detail:
Vintage Stock, Inc.
Vintage Stock operates a chain of 60 retail stores which buy, sell, and trade new and pre-owned movies, video games, comic books, and collectibles. Established in 1980 as a book store, Vintage Stock is now recognized as America’s largest entertainment superstore. The company’s 60 stores are located throughout Texas, Oklahoma, Kansas, Missouri, Colorado, Illinois, Arkansas, New Mexica, and Idaho. Vintage Stock generated $71MM in revenue for LIVE in 2017, in line with their estimates. Operating income from Vintage Stock revenue increased from ($5MM) to +$8MM from 2016 to 2017. Vintage Stock takes advantage of their square footage, with average store sizes ranging from 3,000 sq. ft to 50,000 sq. ft.
The company has a consistent, predictable business model and generates solid earnings year after year. Vintage Stock generates most of its growth from the development of new games, new consoles, as well as new movies and comic books. Since being acquired by LIVE, the company has opened 9 new stores, targeting 5-7 new store openings per year. This is an interesting dichotomy given the tumultuous recent history of retailers in the United States (see “Amazon Taking Over The World”). Nevertheless, Vintage Stock, Inc is seeing high single digit YoY revenue growth consistently, what’s not to love about a business like that?
Marquis Industries, Inc.
Marquis Industries manufactures and sells carpet, vinyl, and wood floor coverings in North America. The floor covering industry is a lot larger than I anticipated, with $24.47B in sales in 2016. Floor covering sales are driven by the homeowner remodeling and residential builder markets, existing home sales & housing starts, average house size, as well as home ownership. Also, the level of sales in the floor covering industry is influenced by consumer confidence (which is high currently), spending for durable goods (also high), the condition of residential and commercial construction (increased since Trump presidency), and overall strength of economy (US remains strong). Along with floor coverings, the Carpet and Rug industry generated $11.53B in sales in 2016, and Hard Surfaces turned in $12.94B in industry sales.
Marquis began operation in 1997 and was acquired by Live Ventures in 2015. It’s important to note that Marquis has been profitable every year since its inception (this goes along with LIVE’s criteria for business acquisitions). The carpet company is a leader in the value-oriented polyester carpet sector, which happens to be the fastest growing fiber category in the industry (this is important to remember because leading in a value-oriented product means that sales won’t be hit as hard as a premium-like brand should economic conditions worsen). The company has a strong reputation for outstanding value, styling, and customer service while operating through 13 divisions with each division specializing in a unique area.
Marquis is committed to growing its business through investments into several attractive areas of business such as printed carpet and yarn extrusion, while anticipating greater throughput and decreased waste. The company achieved revenues beyond forecasts for 2017, coming in at $78MM in revenue compared to high-end internal estimates of $74MM, an increase of nearly 10% YoY.
Much of this growth within the company can be attributed to their competitive advantage of being a fully integrated carpet mill. This means that they are able to produce their carpet at the lowest cost possible compared to its competitors, thus making it a one stop shop for soft and hard surface products. This allows their customers to save time and receive exceptional service because every part of the process is under one roof, so to speak. But the company doesn’t lead competition in price points. Due to its lean operation structure, the company is able to invest additional capital into manufacturing equipment, computer systems, and marketing strategies to provide a moat for itself, a durable competitive advantage in service based on factors exogenous to price.
The legacy business is a marginal part of LIVE that will eventually fade out over time as the company transitions into a conglomerate of well-run businesses. The Legacy Business incorporates the companies early years with their product InstantProfile, which generates service revenue for all existing clients. LIVE is no longer accepting new customers for this business, but will continue to service its existing customers. Think of it as additional revenue while the company completes its makeover. It’s nice to have coming in.
LIVE’s Acquisition Strategy
Working with consultants in various industries across the US, LIVE began looking for profitable companies with consistent earnings power in 2015. As part of their business mission, they have a criteria, a filter if you will, in which a company must pass through before it becomes a serious candidate for acquisition (think of this the way you think of stock screeners, only the best ideas are weeded out). Below is the target criteria for what LIVE looks for in a business (my comments in parentheses):
- Mature companies in growing industries.
- Strong management team (“Skin in the Game”).
- Minimum of 25% IRR, $40 – $250M in sales, $10M in pretax earnings (mainly small – mid-sized companies).
- Predictable cash flows, revenues, and can add scale to LIVE.
Some might be reading this and be thinking, “Well, they sound like a Private Equity firm that’s gone public.” There’s some truth to that, and LIVE even admits this comparison in their slide deck presentation. LIVE believes they differ from private equity firms in the following two ways: 1) LIVE has a longer time horizon than the typical private equity firms, and 2) LIVE’s goal is to increase value over the long-term through acquisitions and organic growth. In other words, they aren’t in this business to make a quick buck, or to pull an Icahn and go ballistic with overhauling management, take the company to liquidation, and harvest the spoils while disregarding shareholders. LIVE sees themselves as owners of high quality businesses that they want to hold for a long time.
Focus on Management
With a company this small and management’s stake so large, its vital to understand the management’s history. Jon Isaac is the founder of Isaac Capital Group, the company that bought out (then) LiveDeal.com on the brink of financial disaster and delisting from the exchange. Jon began Isaac Capital Group in 1988 as a small private investment firm that has now grown into a global investment machine specializing in businesses with well-run management teams. Think of them as friendly activists.
Where management comes into play is in the ownership stake in LIVE. Jon owns 40% of the company outright and initiated a voluntary capital lock-up period of 5 years. This is the definition of management being aligned with their shareholders, and this signifies a management team that is focused on the long – term value creation of the business.
Valuing The Company
Right off the bat, the company is trading at a 32% discount to its book value. So if the company merely rises to the value of its assets on its book, you will have booked a 32% gain, without taking into consideration any growth within the company. However, if we project revenues out for the next five years to grow at a modest 10% in 2018, 7.5% in 2019, and then 2.5% – 3% the remaining three years, we arrive at an annual revenue of $194MM by 2022. If we take the historical EBITDA as a 11% average of revenue, that gives us an EBITDA of $23MM.
Since the company is looking to acquire and growth through those acquisitions, I’ve assumed double the capital expenditure, which puts CapEx at 4% of revenues. From these projections we can calculate our FCF over the next five years, which goes from $9M in 2019 to $12M in 2022.
Adding up the FCF from each projected year with ranges from low to high gives us the Private Value of our Discrete Cash Flows in a range between $33M and $34M. Assuming a perpetuity growth rate between 1.50% – 2.50% we get a terminal cash flow of $12MM. Applying our terminal discount factor of 62% and you’re left with the Private Value of Terminal Value of the Cash Flows, a range between $72MM and $92MM. Now we can add the terminal value to our discrete cash flow to get an Enterprise Range of $104MM – $125MM. This shouldn’t be too far-fetched because the assets on the books alone are worth $100MM.
From this range we can get a range of the fair value per share by adding cash and subtracting debt, which would give us a common equity value range of $29M – $51M. Divide that by the number of shares outstanding (which is basically 2 million) and you’re left with a fair value range of $14.55 – $25, but for the sake of argument, we’re going to put the lower end range at book value, so $19.
Reading The Tape
The chart above is in monthly bars, and you can see the consolidation / wedge pattern forming. I would look to enter a starting position if I see price stay supported in this $13 range, and continue to add heavily as price moves above the 50MA around the $14.25 – $14.50 range. This has the feels of a high conviction investment, so I am willing to put my stops down around the $6 levels.
Where Is My Fallibility?
- Management could leverage the company to absurd levels for the sake of acquisitions and to make it look like the company is growing on the books. If this happens, I know that management is stretching beyond its means for the sake of acquiring companies.
- Management could start paying too much for companies, even if they don’t have to use leverage, they could end up paying higher multiples for a company where they could have gotten a better price.
- Management invests outside their scope of competence. Right now management is specializing in retail and industrial companies, so if I see them investing in some crazy biotechnology company, it would be worth it to check to see if management is still aligned with their mission statement.
- Jon Isaac starts dumping shares. This could mean something internally has changed within the business. I don’t think this is likely, but it is definitely something that would prove my bullish thesis wrong.
I’m sure there is more I missed in the fallibility section. Luckily, that’s what the comments section is for! Drop a critique, concern, or appreciation, all are welcome!