Live Ventures: Inflation Pressures, But Low Stock Price Allows Wide Margin Of Safety

I have been following Live Ventures (NASDAQ:LIVE) since first taking a stake just over a year ago. I first found the company by employing a stock screener to find undervalued high-growth businesses, Live Ventures ticked all the boxes for me:

• Under most metrics LIVE looked incredibly attractive both on an absolute basis and in comparison to businesses that operate in the same sectors as the companies that LIVE owns do
• The company was putting up impressive growth whilst simultaneously producing loads of cash
• The company had strong coverage of its debt obligations and the ability to drive further balance sheet improvement through continued strong free cash flow generation
• The board (CEO Jon Isaac in particular) had proven its ability to buy, reinvest in and grow small businesses with notable excellence

A year later that core thesis largely hasn’t changed, yet the stock price is down 50% since I first wrote that article. This can all be attributed to the continued SEC overhang that Live Ventures faces which I discussed in a previous article. There hasn’t been any further news in that regard as Live Ventures filed a motion to dismiss all the way back in September 2021 – there have been no further filings since.

I still believe LIVE is undervalued and will drive more success and growth in the future as it strengthens its existing businesses whilst simultaneously bringing more solid profitable businesses under its wing. In this article, I am going to discuss LIVE’s recent results in the context of current inflation and how it’s affecting the company. I will also outline my expectations moving forward.

Q3 Results – Inflation affecting margins

Revenues of $69 million in Q3 represented a decline of 1.7% from 2021, this was attributed to the previous stimulus benefit received by Vintage Stock, which was the segment that saw the largest decline in sales YoY (-13%). It is also necessary to note that $2.1 million in revenues for this quarter was related to the company’s variable interest in SW Financial. LIVE announced its intent to acquire SW in June 2021 but it still hasn’t been approved by FINRA – this is most likely due to the SEC litigation.

On the whole in terms of revenues, LIVE is proving that the improved performance seen since the start of the pandemic is enduring. For a quick comparison, at the start of 2020 Live Ventures reported $42 million in revenues for both Retail and Flooring combined, in the last quarter that was over $53 million.

Ultimately the top-line wasn’t in focus, it was the bottom line figures that stood out and its clear LIVE suffered. Operating income was down 24.1% to $8.4 million. This is primarily due to LIVE feeling the brunt of inflationary pressures. As a company that owns retail and manufacturing businesses, this was always going to be the case if inflation soared. This is because input costs for its flooring business (Marquis) have risen while consumer spending has tightened causing a decline in sales for its retail segment (Vintage Stock). Net income was $15.4 million, 90% or $13.9 million was actually attributable to gain on bankruptcy settlements related to Appliance Smart. So the figure used for valuation metrics should be $1.5 million.

It is pleasing that despite extraordinarily high inflation levels and supply chain disruptions, LIVE is still able to deliver profitability. The cash position stood at over $6 million at the end of the quarter as $5.2 million of cash flow was generated from operating activities, this was down 75% YoY. Even as LIVE experiences quite remarkable inflationary pressures squeezing margins, the company is still only trading at around 7x EV/OCF if the current quarter was annualized. In more accommodating conditions LIVE has shown it can produce that much OCF in just one quarter (same Q last year). LIVE currently trades at just under 4x EV/EBITDA (FY21) with a return on equity of over 30%.

I believe the repurchase of 65,000 shares is a testament to the board’s belief in the undervaluation of the firm. Moreover, it also highlights the strength of the balance sheet and the ability of the firm to get through push through inflationary pressures.

Shareholders should welcome the new more simplified capital structure of the company. Series B convertible stock (all owned by CEO Jon Isaac) was converted into normal shares. This now means diluted earnings per share is the accurate figure. Previously the Series B shares (which represented just over 50% of the share count), were not included when calculating the EPS figure. This increased the risk of investors making mistakes when calculating LIVE’s valuation.

Steel Manufacturing’s performance over the quarter is a great example of the success of LIVE as a holdings business in driving better operating efficiencies in its businesses to unlock value. Revenue remained level while operating income surged 56.1% to $2.7 million.

Kinetic acquisition and Looking ahead

The strength of LIVE’s balance sheet was further reinforced by the announcement of the acquisition of Kinetic for $26 million at the end of June. The company used a mix of debt, sale-leaseback of the real estate owned by Kinetic and its own cash to pay for the transaction. Kinetic produces industrial knives and hardened wear products and will be a new addition to LIVE’s steel manufacturing segment as it joins Precision Marshall. Considering the fact Precision Marshall has been an outlier in terms of the resilience of its performance over the last quarter, it doesn’t surprise me that Mr. Isaac wants to acquire another business in this segment. I believe this will likely prove to be a shrewd acquisition and LIVE will make meaningful investments into operations to improve margins and broaden demand.

Looking ahead, I believe the upcoming quarterly results will once again show that LIVE’s margins are feeling the pressure of inflation as CPI remained elevated in Q2. This will be somewhat mitigated by Precision Marshall’s resilient performance – likely to continue, however, both Retail and Flooring will see large declines in operating and net margins again YoY. Therefore the share price may very well see further near-term downside. The long-term thesis on the other hand remains intact. LIVE has been undeterred in its acquisition strategy and maintains a wide margin of safety due to the material improvements made in its subsidiaries over the last few years. My holding remains unchanged and I keep a long-term ‘buy’ stance on Live Ventures.