Liquidity Services (LQDT) drew fresh attention after hosting the high profile Miami Dade County Courthouse auction on its GovDeals marketplace, highlighting how its platform can handle complex, high engagement real estate disposals.

Against that backdrop, Liquidity Services’ share price has pulled back over the past week, even after a strong 30 day share price return of 7.52% and a 90 day share price return of 15.30%. The 1 year total shareholder return of 59.34% and 3 year total shareholder return of 124.49% point to momentum that has been building over a longer period.

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After a strong run in Liquidity Services and a recent pullback, the stock now trades at a double digit discount to both analyst targets and estimated fair value. Is that caution sensible once you examine the valuation drivers in more detail?

Price to earnings of 39.5x, is it justified for Liquidity Services?

Liquidity Services currently trades on a P/E of 39.5x, which leaves the stock looking expensive relative to peers even after the recent pullback from $41.89.

The P/E ratio compares the share price with earnings per share, so a higher P/E usually reflects higher expectations for future earnings. For a company like Liquidity Services, which operates several online marketplaces and software tools, investors often focus on earnings quality and growth to judge whether this kind of earnings multiple makes sense.

Here, the picture is mixed. On one hand, Liquidity Services is judged to have high quality earnings, with profit margins at 6.8% compared with 5.7% last year and earnings growth of 24.8% over the past year. Earnings growth over the past year also exceeds its own 5 year average, and company earnings growth over the past year is described as stronger than the wider US Commercial Services industry. On the other hand, a 14.1% return on equity is characterised as low, and the company scores 2 out of 6 on the internal value score, which points to some valuation pressure at current levels.

Relative to peers, that 39.5x P/E is described as expensive compared with the US Commercial Services industry average of 17.8x, and also expensive against the estimated fair P/E of 22.6x that the fair ratio model suggests the market could move toward over time. This gap between the current P/E and the fair ratio is material and indicates investors are already paying a premium for Liquidity Services compared with both peers and the modelled fair multiple.

Explore the SWS fair ratio for Liquidity Services.

Result: Price-to-earnings of 39.5x (OVERVALUED)

However, investors in Liquidity Services still need to weigh execution risk in its multi segment model and the possibility that current high P/E expectations prove too optimistic.

Another view on Liquidity Services valuation

The P/E of 39.5x makes Liquidity Services look expensive, yet the SWS DCF model points in a different direction. At a share price of $41.89, the stock trades below an estimated future cash flow value of $54.83, which implies a 23.6% discount.

This gap between earnings based valuation and the SWS DCF model raises an important question. Is the market putting too much weight on current earnings multiples and not enough on the future cash flow profile of Liquidity Services, or is the model assuming more than you are comfortable with for this kind of business?

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Liquidity Services for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 51 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

Given the mix of enthusiasm and caution around Liquidity Services right now, it makes sense to move quickly and test the numbers yourself against both the potential upside and the areas of concern. To see the full balance of what is worrying investors and what they are optimistic about, review the 3 key rewards and 1 important warning sign.

Looking for more investment ideas beyond Liquidity Services?

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.