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Rocky Mountain: Way Too Cheap

Saj Karsan profile picture
Saj Karsan

(Editor's note: shares offer better liquidity on the Toronto Stock Exchange under ticker RME.TO)

Shares of Rocky Mountain Dealerships (OTCPK:RCKXF) have fallen dramatically over the last few months, for issues that appear to be only short term in nature. As a result, the company can be purchased for not much more than its 2007 IPO price.

But since that IPO six years ago, both sales and operating income have tripled. Consequently, the company now trades at a P/E of less than 10 despite a history of stellar returns on capital, including an ROE* of 19% for 2012.

The Business

Rocky Mountain sells equipment (including tractors, combines, excavators etc.) for the agriculture and construction industries through its 40+ dealerships throughout the Canadian Prairies. It operates as an independent dealer of Case, one of the world's largest agriculture equipment manufacturers. More on Rocky Equipment Dealerships' business can be found in the company's Annual Information Form.


The company has managed to grow quickly thanks to its acquisition strategy. Rocky Mountain has picked up a number of smaller dealerships, such that it is now the largest Case equipment dealer in Canada.

An acquisition strategy of this nature has two benefits. First, the company is able to arbitrage the "multiple" difference between private and public companies; Rocky Mountain can purchase a private company at a smaller multiple of sales/earnings than it receives for its own shares.

The second benefit arises through economies of scale. The company can spread marketing, purchasing, technology and other fixed expenses across a higher number of units, providing for better margins versus those of its competition.

The company is currently run by the same management team, which initiated and executed this strategy. The company's returns on capital (depicted below) suggest the strategy has been working and that management has been a prudent allocator of

This article was written by

Saj Karsan profile picture
Saj Karsan founded an investment and research firm that is based on the principles of value investing. He has an MBA from the Richard Ivey School of Business, has completed all three CFA exams, and has an engineering degree from McGill University. Visit his blog, Barel Karsan (http://barelkarsan.com/).

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Comments (9)

Martin Keck profile picture
Today -5.98%. Results were good in relation to current valuation of the company. Lower debt, higher equity.
What's not to like? Too low new equipment sales?
hardcorevalue profile picture
Thanks, another day, great comments. I wasn't looking at the absolute level of debt rather, the interest expense compared to profitability. The interest coverage is a little thin for my liking.

My concern would be a reversion to the mean in crop prices which would slow farm expenditures from these seeming high levels.
mister-ugly profile picture
the AEM Association of Equipment Manufacturers of Canada released these sales figures on 10//10/2013: 2wd 40hp farm tractors for Sept 2013 down 7%: YTD thru Sept up 13.2% over 2012; 40hp to 100hp down 7.8% YTD thru Sept down 1.9%; 100 plus HP down 9.6% for YTD Thru Sept up 13.8% 4wd tractors only 46 sold versus 97 for YTD 2012. down 52.6% sizeable decrease not much volume. In self prop combines down 35.9% YTD versus 2012 and for year down 1.4% It appears farmers bought early this year. Interesting almost all 2WD Tractors. So what is the correlation of regulation? I have not found out?
anotherday14 profile picture
A few quick comments on the name:

brettmag: Rocky has a few stores in Saskatchewan as well so they too will benefit from the year those farmers have had. Rocky's main footprint is in Alberta and you will find that Alberta farmers have also been seeing record yields this year.

harcorevalue: You have to be careful when looking at the debt of this company because you need to strip out the floorplan payables since that is not actual corporate debt. Bloomberg does not make the distinction which is why dealerships in general do not screen cheap. The company’s corporate debt is around 51 million. You make the same adjustment to the debt figures when looking at Cervus, Titan, auto dealers, or Rush enterprises.

One issue not touched upon in this article that is very important is the strategy of the company. In the process of buying up all the mom and pop Case dealers in Western Canada, the company will not only improve the sales of equipment, but also the parts and service business of the dealerships they acquire. This is important because the parts and service business is very high margin. Not only does growth in that area benefit margins, but it helps decrease the cyclicality of the business. The growth in parts and service takes a few years because first you need to have a pick-up in sales at the dealership level of equipment before you can realize the benefit of people bringing more equipment to you for parts and service. In past presentations the company has included a slide about post acquisition performance improvement. I would urge everyone to look at that slide because it shows how powerful the acquisitions can be. To see how powerful growing the parts and service business can be, I would suggest people look at Rush Enterprises as an example.

Finally, while I own this stock, I think it is a long term play. I do not think Q3 will be anything spectacular as management continues to pare down inventory and focuses less on new sales. I think long term this is the right decision, but it will have an impact on Q3 and likely Q4. That being said, as they exit Q4, they will be in a great position inventory wise, have lots of cash on the balance sheet, and as alluded to above the farmers are having a good year. The price of crops are down, but that is as a result of the record yields and the farmers in that scenario still make good money and they will as always look to spend that money.
mister-ugly profile picture
would you like to comment on titn versus rckxf? and expand on problems in purchasing new OEM equipment in recently enacted regulations? I cannot imagine farmers preferring to purchase used equipment for such an on demand industry. In this field used usually means either outdated, or used up. Tax write-offs, stable growth crops, warranties, improved new design equipment, fuel advantages, technology, risk factor of using used equipment, all make for peace of mind in purchasing reliable new equipment.
hardcorevalue profile picture
Any concerns on their debt? less than 4x interest coverage.
Martin Keck profile picture
I am also long RME.TO. Could you elaborate why CVL.TO is better value?
I prefer CVL. Farmers in Saskatchewan had an amazing (record, or near record) harvest and have tons of cash to be buying new equipment for next season.
Netwall profile picture
the ticker on US exchange is : (RCKXF)

Thanks for the article. We will take a deeper look.
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