Shares of Ritchie Bros. Can auctioneers continue to generously reward investors?
RAuctioneers Itchie Bros. (RBA) have rewarded investors especially over the past decade as the company’s growth strategy expands its presence in the auction industry. While the business model looks attractive and the company’s capital return track record is truly impressive, RBA’s valuation is likely too expensive to justify capital allocation to the stock now. Accordingly, I am neutral on the title.
Ritchie Bros. Auctioneers is a global leader in auctions and commercial asset disposal technology, selling $5.5 billion worth of used equipment and other assets last year.
Through its no-reserve auctions, online marketplaces, listings and private brokerage services, Ritchie Bros. sells a wide range of primarily used commercial and industrial assets as well as government surplus. These assets constitute the bulk of the equipment sold by Gross Transaction Value (GTV).
The company’s customers (i.e. those who sell the equipment) include end users such as construction companies, equipment dealers, and original equipment manufacturers, among others.
An end-to-end auction ecosystem with strong prospects for expansion
The Ritchie Bros. Investment Case is particularly interesting because there is a lot of economic value that can be unlocked through auctions. As the company specializes in the field and masters the entire end-to-end value chain of these transactions, it can generate cash flow on several fronts.
These value-added services include equipment financing, asset appraisals and reviews, logistics services, and other support services, such as equipment refurbishment. Thus, the growth potential of Ritchie Bros. is huge.
Note: RBA is a Canadian company listed on both the NYSE and the TSX. All figures in this article are in US dollars.
RBA maintained its financial momentum
The performance of Ritchie Bros. remained very strong during the pandemic. Despite the hurdles at the time, assets sold off quickly during the peak panic period boosted the company’s GTV dollar value volumes. Its momentum has continued over the past year and into the company’s latest first quarter results, as ongoing supply chain disruptions have maintained a very challenging environment for equipment.
Driven by a favorable business environment for the company, revenue grew approximately 19% year over year to $393.9 million in the prior quarter. Specifically, total service revenue and inventory sales revenue increased by 19% each.
Service revenue growth was fueled by 26% growth in the fee segment and 12% increase in fee income. The fee growth was driven by GTV growth of 13%, as well as high buyer fee rates applied in 2021 and early 2022.
Regarding its profitability, adjusted net income and EPS jumped 42% and 44% at $50.9 million and $0.46, respectively. This is explained by higher margins due to rather stable service costs compared to higher revenues. In particular, total operating expenses only increased by 15%. Thus, the adjusted operating margin increased from 17.4% to 22.6% compared to the same period of the previous year.
In my opinion, the upcoming second quarter results of Ritchie Bros. will reveal whether the company’s momentum is sustained. Supply chain bottlenecks have not eased at all, as evidenced by container shipping rates that remain at record highs.
In addition, the company’s growth initiatives look very promising. Its RBFS (Ritchie Bros. Financial Services) division, for example, grew 71% to $15.7 million in the first quarter, while its cumulative IMS (Inventory Management System) activations soared 103% compared to the period of the previous year.
These initiatives still represent a small portion of total revenue, but they could accelerate business performance due to their explosive pace of growth.
The dividend is attractive, but not at this valuation
Like the end-to-end auction ecosystem of Ritchie Bros. has continued to grow, the net income and dividend distributions also increased. In fact, Ritchie Bros. has increased its dividend per share every year without exception since 2004, honoring an 18-year history of dividend growth.
Last year’s 13.6% dividend increase was higher than the 10-year dividend per share growth CAGR of 8.3%. This may indicate that management expects EPS growth to accelerate in the future.
In any case, based on consensus EPS estimates of $2.04 for fiscal 2022, the payout ratio is currently below 50%, which is a pretty healthy level, in my opinion.
Despite the company’s long history of dividend growth, the dividend yield is only around 1.5%, with shares gaining 17.5% over the past year. This should be a rather unattractive return for investors focused on income and dividend growth in a rising rate environment, even if dividend increases were to remain in the double digits.
Additionally, the consensus EPS estimate implies a P/E of around 34 at current share price levels, which I find very expensive in the current environment, even if Ritchie Bros. . had to be supported.
Wall Street’s view on RBA stocks
When it comes to Wall Street, Ritchie Bros. has a moderate buy consensus rating based on three buy, two hold, and one sell rating over the past three months. At $65.60, Ritchie Bros.’ average price target. implies a downside potential of 5.2%.
Conclusion: Great company, but wait for a drop in share price
Ritchie Bros. Auctioneers is an excellent company with a proven track record of creating shareholder value. While the company’s momentum is likely to continue in its upcoming results, I think the shares are very expensive at their current valuation.
With yield having been significantly reduced of late, dividend yields could hardly offset the risks of a possible compression of valuation multiples as well. Thus, it is probably best to avoid the stock at its current levels.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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