Ritchie Bros. (RBA) – Value Trap?

RBA - Ritchie Brother Auctioneer Most auctions we get exposed to in life is either from movies where high priced art is being auctioned or from the annual local police auction where unclaimed items, such as bicycles.

There is, however, a big business in auctioning used equipment and Ritchie Bros. Auctioneers has managed to tap into this market. The cost of entry in purchasing expensive equipment has generated a secondary market.

RBA Business Summary

Ritchie Bros. Auctioneers is the world’s largest industrial equipment auctioneer, with 44 auction sites, live simulcast online participation, and operations in 19 countries.

RBA offers value propositions through Ritchie Bros. Auctioneers, Equipment One and Mascus. RBA’s ability to attract a global audience through our 21-language website and live simulcast bidding technology ensures equipment sellers receive global market value for their equipment, allowing them to reach international buyers, and transcend regional economic conditions and equipment demand.

By The Numbers

When a company has clear objectives and goals to execute against, it’s usually only a matter of time until the results are seen. Below is the strategic roadmap Ritchie Bros. has in place to execute against.

RBA Strategic Roadmap
Source: RBA March 2017 Presentation

RBA Revenue

RBA Revenue Breakdown
Source: RBA March 2017 Presentation

While Ritchie Bros. is a Canadian company, it is truly international when you see the revenue breakdown. With nearly 50% of its revenue coming from the US, RBA has established itself in strong markets.

Technology and the internet have allowed for more than half of the bidders to come from outside the regions. Local markets are becoming global. This new behavior has allowed RBA to support different regions based on their economic cycles and remain pertinent year long regardless of the regions.

While Ritchie Bros. has a strategic roadmap to grow the top and bottom line. RBA is active in the M&A space (Merger & Acquisition) as seen in the graph below.

RBA M&A Timeline
Source: RBA March 2017 Presentation

RBA Dividend Summary

RBA is a Canadian Dividend Aristocrats and a Dividend Achiever amongst 33 Canadian stocks getting the honor of having more than 10 years of dividend growth. With a regular annual dividend growth near 10%, RBA has good dividend growth. See below for its 3, 5 and 10-year averages.

  • 3 year average of 9.33%
  • 5 year average of 8.70%
  • 10 year average of 9.76%

The dividend growth is above average.

  • 3 year average of 9.01%
  • 5 year average of 9.63%
  • 10 year average of 7.56%

All the trends are moving in the right direction. While the current trends look good and the dividend is keeping up with the bottom line growth. Ritchie Bros. is not quite a Dividend Ambassador, but it’s not far from it with a 9.76% 10-year CAGR dividend growth.

RBA - Dividend vs EPS

While the trailing twelve months payout ratio is currently hurting and breaking above 100%, it can be attributed to acquisition costs which would ultimately improve the top and bottom line.

Investment Philosophy #1: BUSINESS QUALITY

At first glance, the auction business doesn’t seem like an essential business. How would buying second-hand goods be a strong business? Ritchie Bros. has been able to show skeptic otherwise by growing their business to their size and highlighting key markets.

They aren’t waiting for Craigslist to cover their market or another internet disruptor like Airbnb or Uber to take their market share. They have already established their auctions online in real-time linking the world and breaking down the physical barrier to purchase used goods.

While not an essential service, businesses operating in the essential services we need such as farming and mining are in need of RBA’s products offered through auctions. The gross auction revenue per year is showing the results of their business and effort to break down location barriers.

RBA - Top Line Growth
Source: RBA Website Historical Metrics

Investing Opportunity Score: 55%

Based on my Opportunity Score formula, Ritchie Bros. (TSE:RBA, NYSE:RBA) has a score of 55% (the higher, the better) for being an investing opportunity. Above 60% is a good range to pay attention to an opportunity. Anything around 80% would have a short window of opportunity unless the stock got beaten down for other qualitative reasons. See my Easy Stock Selection Process for more details on how I select stocks for my portfolio.

RBA’s score is currently hurting due to the trailing twelve months EPS. If you are not bothered by the acquisitions for growth and the short term impact on their EPS, RBA may be a hidden opportunity as it has pulled back significantly over the past six months. It is currently trading near the 52-week lows.

With that said, it could also be a value trap due to industrial cycles and demand for machinery. More analysis would be needed to establish if growth will continue due to economic cycles. The dividend is low to have money sitting for a long period of time waiting for recovery.

Do you want to find out where the competitors stack up against MRU? There are 12 stocks in the consumer defensive sector to be compared. Subscribe to the Dividend Performance List over at Dividend Snapshot and easily compare many key stock data points before making your next investment.

Disclosure: At the time of writing, I have no position in RBA. See my Stock Portfolio for my current holdings.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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