Ritchie Bros. Auctioneers (NYSE:RBA)
Share Price: $18
Intrinsic Value: $17
Buy Below: $12
Ritchie Bros. Auctioneers Incorporated (RBA) is an industrial auctioneer. As of December 31, 2009, the Company operated from over 110 locations in more than 25 countries, including 40 auction sites worldwide. It sells, through unreserved public auctions, a range of used and unused industrial assets, including equipment, trucks and other assets utilized in the construction, transportation, agricultural, material handling, mining, forestry, petroleum and marine industries. It conducts auctions in more than 20 countries, and has auctions in North America, Central America, Europe, Australia, Asia and the Middle East. During the year ended December 31, 2009, the Company conducted 195 unreserved industrial auctions at locations in North and Central America, Europe, the Middle East Australia and India. It also held 132 unreserved agricultural auctions in Canada.
The Company’s customers are both buyers and sellers of equipment, trucks and other industrial assets. The majority of its buyers are end users of equipment (retail buyers), such as contractors, with the remainder being primarily truck and equipment dealers, rental companies and brokers (wholesale buyers). Consignors to its auctions represent a mix of equipment owners, the majority being end users of equipment, with the balance being finance companies, truck and equipment dealers and equipment rental companies, among others.
Source: Google Finance
RBA is the leader in Industrial and agricultural equipment auctions with 4% market share of an estimated $100b industry. Their next largest competitor commands one tenth the market share that RBA has.
RBA stock has been hovering near a 52 week low as investors have come to realize that RBA's business isn't as recession proof as some have thought. When economies perform poorly, auctioneers should do better as more people look to save money by purchasing a used piece of equipment instead of buying new. However, this time around sellers have been keeping equipment off the market, and the equipment that has sold, have gone for less money than in the past thereby reducing revenues for RBA.
RBA benefits from a powerful network effect where the more people that use RBA to sell their equipment attracts more buyers to bid which subsequently provides the seller with the best price possible for their equipment. RBA has been able to prove that their auctions are value added even after their hefty commission of approximately 8%.
RBA runs a hybrid auction process where the equipment is shown at a physical auction location where buyers can look at the items and bid on them while off-site buyers can watch the auction real-time on their computer and place bids remotely. RBA has a series of videos on how the process works, it is absolutely fascinating and worth a view. Here is a link to their videos.
RBA’s balance sheet is strong with $158mm in cash and $130 in debt. Capital expenditures have averaged around $100mm over the past couple of years and will come in around $80mm for calendar 2010. EBITDA is estimated to be around $157, so this should more than meet any CapEx requirements.
RBA has a competitive moat around its business. RBA is able to command premium pricing over their competitors and still gain market share. The majority of the $100b industry is local brokers and placing adds in local trade publications. However, large industrial equipment will be sold at a more organized structure such as RBA's auction process.
Iron Planet is its largest commercial competitor, but operates a fully on-line auction. We believe there is room for both in this market place. With every new client that IP courts away from local brokers only helps to legitimatize the commercial auction process.
We believe it is feasible for RBA to garner more market share over time. The amount is unknown, but RBA should grow faster than the auction equipment market. RBA targets 15% long-term growth in earnings per share, we think this target is achievable over the next decade given the relative infancy of the market, barriers to entry, and potential global expansion.
RBA generates a healthy Return-On-Invested-Capital (NASDAQ:ROIC). It has averaged over 14% over the past decade and is currently 11.2% on a TTM basis. This should well outpace their cost of capital over time.
Management and Stewardship:
CEO James Blake started with the firm in 1991 and have worked his way up to CEO in 2004 when David Ritchie retired. Compensation seems fair for a firm of its size. Directors are elected annually and CEO and chairman role are separate. High and sustainable ROIC indicated management has done a good job managing the business and reinvesting cash flows.
RBA doesn't typically generate free-cash-flow (NYSE:FCF) because management puts back all excess cash flow into building new auction site to expand their footprint. However, management has indicated that over the next two years they will cut their expansion efforts, so FCF is a possibility. We estimate calendar year 2010 FCF of $55mm.
Based on our discounted cash flow analysis (DCF), the shares are worth $18.66, approximately the same as RBA's current share price.
Years LOW MIDDLE HIGH
1 11.0% 14.0% 19.0%
2 16.0% 21.0% 26.0%
3 -5.0% 0.0% 5.0%
4 -5.0% 0.0% 5.0%
5 -5.0% 0.0% 5.0%
6-10 -3.0% 0.0% 5.0%
11-20 22.0% 25.0% 28.0%
Terminal 2.0% 2.5% 3.0%
Discount Rate 10.5% 10.5% 10.5%
Dilution 0.6% 0.5% 0.4%
Total per share IV $11.05 $18.66 $36.02
Multiple to Y0 FCF 22.8x 38.4x 74.2x
Price% of IV 1.6x 1.0x 0.5x
Upside/current -39% 4% 100%
Upside/purchase -39% 4% 100%
Another way to look at RBA is using a multiple of estimated revenue. We believe RBA can achieve estimated revenue of 758, 1,520, and 3,590 for the next 5, 10, and 20 years respectively. RBA has traded at an average of 8x revenue over the past 5 years and currently trades at 5.4x sales. We think a fair multiple to use five years out is 4x sales which off of $758mm in revenue gets you to a market cap of $3,032 or $27.50 or an annualized return of 8.55% over five years, not bad, but nothing spectacular either.
Keep in mind that the mid-cap growth index has a p/s ratio of 2x. If you assume that RBA's multiple to sales eventually comes down to an industry average than RBA would be worth around $70 per share 20 years out. This equals a return on investment of under 7% annualized (factoring in a small amount of share dilution over time).
We think a more appropriate valuation is using a p/s ratio on estimated calendar year 2011 revenue of $446mm. 4x revenue on $446mm equates to a share price of just over $16.
To achieve our targeted upside of 30%, we would recommend purchasing the shares at, or below, $12.
We do not have a position in RBA but that may change at anytime. We use or best efforts to obtain good data in our models, however it can’t be guaranteed that our inputs and data are correct. This is not a recommendation for readers to purchase RBA without consulting your financial professional to discuss your own risk tolerance and objectives. This is for informational purposes only. We are under no obligation to update our research. Please conduct your own research.
Disclosure: No Position