Live Ventures: Caution Ahead, Stock Could Dive (NASDAQ:LIVE)

Live Ventures Incorporated (NASDAQ:LIVE) has had a roller coaster year concerning its share price, as it has traded in a range of $22.81 to $45.00. While that in and of itself is somewhat tame when compared to many other companies, when it did rise and fall throughout the year, it did so quickly and steep.

Interestingly, not long after its weak earnings report the share price of the company soared, climbing from its 52-week low of $22.81 per share on December 19, 2022, to a little over $40 per share on January 10, 2023. With that type of move without an identifiable catalyst, I have no doubt it’s about to correct again, as it has over the last year.

Last time it quickly crashed, starting on June 2, 2022, it plunged from just under $42.00 per share to almost $23.00 per share on June 22, 2022; and that was after a fairly moderate decline over a three-month period, compared to other fast and steep moves it made over the last year.

It looks like to me there are some speculators taking positions on both sides of the play over the last twelve months, based upon the many charts I’ve looked at over the last year that usually have a period of an upward move earlier in 2022, and afterwards basically flatlines.

I mention that for those that may think there’s something driving the recent jump in LIVE’s share price so you don’t get caught holding shares at a high cost basis. If there was a catalyst or two that was behind the spike, it would make more sense, but since there isn’t, these are presumably swing traders riding the momentum off and on.

In the near term there should be a significant correction, and after that we’ll find out if there is a higher bottom going forward, or if this is just a feint with no legs at all to it.

As far as the company itself, there was nothing compelling in the latest earnings report that would be a tailwind for the stock, as many metrics, which we’ll look at in a moment, were down for the quarter.

In this article we’ll look at the latest numbers, the business strategy of the company, and why it’ll probably trade flat or slightly down through 2023, barring an acquisition that may move the needle upward.

Some of the numbers

Revenue in the fourth fiscal quarter of 2022 was $73.8 million, up 4.6 percent from revenue of $70.5 million in the fourth fiscal quarter of 2021.

The segments contributing to the decline were Retail, which dropped from $20.7 million in the fourth fiscal quarter of 2021 to $19.977 million in the fourth fiscal quarter of 2022, down 3.7 percent. The other segment was Corporate & Other, which dropped from $4.238 million in the fourth fiscal quarter of 2021 to $1.535 million in the fourth fiscal quarter of 2022, down 63.8 percent.

Retail revenue was down from the effect of inflation, supply chain constraints, and an unfavorable product mix. The acquisition of Better Backers contributed to the slight increase in revenue for the reporting period, otherwise it would have generated a loss. Its Steel Manufacturing segment was also the beneficiary of the acquisition of Kinetic in June 2022. Other factors in the performance of the unit was better manufacturing efficiencies and price increases.

The main takeaway from the quarter is the company is experiencing a lot of organic weakness, and its acquisitions helped it performance, even with the weak numbers.

The best performing segment in the reporting period was Steel Manufacturing, with revenue of $19.25 million in the fourth fiscal quarter of 2022, compared to revenue of $12.756 million in the fourth fiscal quarter of 2021, up 50.9 percent. Its Flooring Manufacturing segment was basically flat year-over-year.

Operating income in the reporting period was $1.2 million, compared to $9.14 million year-over-year, down 86.8 percent. Corporate & Other were the worst in this metric, having an operating loss of $(6.885) million, down 267.4 percent, compared to an operating loss of $(1.85) million in the fourth fiscal quarter of 2021. Flooring Manufacturing had a net operating income of $2.383 million, down 60.6 percent year-over-year.

Gross profit for full-year 2022 was $97.8 million, down from $99.5 million in full-year 2021. The gross margin percentage decreased to 34.1 percent from 36.4 percent in full-year 2021. The decrease is mainly from tightened margins in its Flooring Manufacturing segment. The Flooring Manufacturing segment gross profit margin fell to 24.4 percent compared to 29.1 percent in the full-year 2021. The decline in came primarily from higher raw material costs.

Adjusted EBITDA in the reporting period was $7.2 million, down 37.5 percent from adjusted EBITDA of $11.5 million in the fourth fiscal quarter of 2021. For full-year fiscal 2022, adjusted EBITDA was $38.4 million, down $6.1 million or 13.8 percent from adjusted EBITDA for full-year 2021. The decline was attributed to profit margin contraction.

For full-year 2022, revenue was $286.9 million, up 5.1 percent from the $273 million in revenue from full-year 2021. Full-year operating income for 2022 was $25.9 million, down 27.6 percent from full-year 2021 operating income of $35.8 million. Net income for full-year 2022 was $24.7 million, or $7.84 per diluted share, down 20.7 percent from net income of $31.2 million, or $9.80 per diluted share for full-year 2021.

Most of the increase in revenue for full-year 2022 came from the acquisitions of Better Backers and Kinetic.

At the end of the fourth fiscal quarter of 2022 the company had cash of $4.6 million and $26.4 million in its lines of credit.

Its acquisition strategy

Live Ventures is a diversified holding company focusing on strategic acquisitions across different market sectors as its growth strategy, with a focus on mid-market companies located in the U.S. market.

Below is the acquisition strategy of the company as listed on its website:

Acquisition Strategy

*Target companies with annual earnings between $5 and $50 million

*Closely held or family-founded businesses with a strong culture and management team that is looking to continue operating the business

*Companies with a defensible market position and track record of stable earnings and cash flow

*Companies in need of new ownership and outside capital to support growth, both organically and through acquisitions

When asked about the parameters of the company’s acquisition strategy on the earnings call, CEO Jon Isaac said this:

As long as it makes money, as long as we like the management team, as long as there’s predictable cash flows. And I think we’ve done a good job at finding those companies and negotiating them and making. There are many times where we bid on companies and we’ve been outbid by others, but the seller ends up selecting us as a buyer. And that’s because of our philosophy and that is because we are not private equity and that’s because we don’t come in and destroy companies or chop them up and flip them. I’m very proud to say that we haven’t sold a company that we’ve acquired. So, the legacy remains when with the company, the founders is happy to see his employees that have been there for 20, 30 years remain there. And as I stated in the press release, we buy-build-hold and that’s really what we adhere to. So that resonates very, very well with many sellers. And we’re happy to look at any opportunities that come across our way.

Taking into consideration the business model of the company, the parameters of its acquisition strategy are solid, but my major concern is the diversified nature of the acquisitions. Instead of focusing on a specific market like Constellation Software has done, while producing extraordinary results of time, LIVE is focusing on any sector that meets is criteria. I consider that a bug and not a feature, and it could be why the company struggles to grow consistently.

Take a look below at the 10-year charts of LIVE and CNSWF to see how their acquisition models and strategies are working. I understand that LIVE changed its business model, but it still has had a prolonged period of trading flat before finally breaking out near the end of 2020. After its big push there, it has pulled back and traded very volatile, although if you had held share in early 2013 you would have been up approximately 437 percent.

On the other hand, with CNSWF’s acquisition model, the company is up 1,447 percent during the same 10-year period, with a steady and consistent growth trajectory. LIVE has yet to prove it can do the same, especially since the time it changed its business model.

If you’re wondering why I’m using CNSWF to contract LIVE, it’s because they have similar parameters when making acquisition decisions, and business models that incorporate strategies that are close to one another, outside of the diversified model LIVE has chosen to use.

Conclusion

I think, even after its recent jump in its share price, LIVE is going to have a big correction based upon the lack of any catalyst that drove the share price up. And looking how the stock has been trading over the last couple of years, it appears it’s being moved by swing traders and shorts that are reacting to the quick share price movements of the stock.

Overall, the company has transitioned to an acquisition growth model with some solid parameters to make buying decisions. Its weakness, in my opinion, is deciding to look for business in almost any sector that aligns with its acquisition guidelines. That’s another way of saying it’s operating as a small conglomerate at this time, and I believe it’s going to struggle to generate consistent profits because of the disparate pieces of the company.

If management can juggle the different businesses operating in various sectors, it could do okay in the years ahead, but it doesn’t have a lot of room for error.

The positive for the company on the acquisition side is its search for smaller firms allows it to buy up companies that don’t draw much, if any attention from the big players. This allows it to negotiate terms without larger competitors bidding up the prices.

This strategy will work as long as the businesses it acquires are able to have an impact on the performance of LIVE. Once it gets larger, it’ll have to move out of its small-business focus and look to larger deals in order to grow the company. It has plenty of time before that happens, but it should be taken into consideration by long-term holders.

When looking at its business model, diversification strategy, and lack of consistency, I think the company is going to struggle in the near term and is due for another steep pullback. Further out, how it’s able to manage companies operating in many sectors will determine its success.

Based upon its charts, it’s going to have to find a way to grow in a consistent, sustainable, profitable manner if it’s going to reward shareholders.

And last, if you’re interested in this company, watch the volatility of the stock as it looks like there are many short-term traders that enter and exit on both sides of the play, and it could create a negative and positive outlook on the stock that isn’t warranted.