RBA Stock Study (3-30-23)

I recently did a stock study on Ritchie Bros Auctioneers Inc. (RBA) with a closing price of $55.42.

M* writes:

     > Ritchie Bros. operates the world’s largest marketplace for
     > heavy equipment. The company started as a live auctioneer
     > of industrial equipment, since then it has greatly expanded
     > its operations to include the sale of construction,
     > agricultural, oilfield, and transportation equipment. Ritchie
     > Bros. operates over 40 live auction sites in more than 12
     > countries, along with online marketplaces, including
     > IronPlanet, Marketplace-E, and GovPlanet. Its agricultural
     > auctions are frequently much smaller venues and can include
     > liquidations of single farms. The company holds over 300
     > auctions yearly and sells $6 billion worth of equipment.

This medium-sized company has grown sales and EPS at annualized rates of 18.1% and 10.7% over the last decade. Lines are generally up and parallel except for EPS declines in ’14, ’16, ’17, and ’21. PTPM has remained above peer and industry averages declining from 28.8% in ’13 to 12.7% in ’17 and rebounding to 23.4% in ’22. Last-5-year average is 16.5%.

Over the last 10 years, ROE has been relatively stable except for a spike in ’22 to 25.6%. ROE has remained mostly above peer and industry averages with a last-5-year average of 18%. Debt-to-Capital over the decade has generally been lower than the industry but higher than peer averages with a last-5-year average of 47.5%. Quick Ratio is 0.86, and Interest Coverage is 8. Value Line rates the company B++ for Financial Strength. M* gives a Standard rating for Capital Allocation, writing “the company’s low balance sheet risk is largely due to its manageable debt levels and access to credit lines.”

I forecast long-term annualized sales growth of 10% based on the following:

• CNN Business projects 94.1% YOY and 55.3% per year for ’23 and ’22-’24, respectively (based on 8 analysts).
• YF projects YOY 97.9% and 20.3% for ’23 and ’24, respectively (7 analysts).
• Zacks projects YOY 80.3% and 30.3% for ’23 and ’24, respectively (2).
• Value Line projects 11.1% annualized growth from ’21-’26.
• CFRA gives an ACE of 98% YOY and 54.3% per year for ’23 and ’22-’24, respectively (6).
• M* offers a 2-year ACE of 80.8% annualized growth.

The lofty growth rates over the next two years are probably due to acquisition of U.S. auto retailer IAA Inc., which completed on March 20 (see here).

I forecast long-term annualized EPS growth of 6% based on the following:

• CNN Business projects contraction of 1.7% YOY for ’23, 8.4% growth per year for ’22-’24 (based on 8 analysts), and 5-year annualized growth of 7%.
• MarketWatch projects growth of 3% YOY and 10.9% per year for ’23 and ’22-’24, respectively (8 analysts).
• Nasdaq.com projects 11.1% YOY growth for ’24 [2 and 1 analyst(s) for ’23 and ’24].
• Seeking Alpha projects 4-year annualized growth of 7%.
• YF projects YOY growth of 3.7% and 13.6% for ’23 and ’24, respectively (8), along with 7% annualized growth for the next five years.
• Zacks projects YOY growth of 4.6% and 15.1% for ’23 and ’24, respectively (3), along with 7% annualized growth for the next five years.
• Value Line projects 14.1% annualized growth from ’21-’26.
• CFRA projects contraction of 18.5% YOY and 0.9% per year for ’23 and ’22-’24, respectively (3).

I am not seeing any bump in estimated EPS for ’23-’24 like I did with sales.

I find it odd that four of five long-term estimates are identical. CNN Business and Seeking Alpha get data from Factset and S&P Global, respectively. YF gets data from Refinitiv, and Zacks is its own data source. Given all different sources, I would not expect duplication unless multiple sources are getting estimates from the same analysts. Even at that, this isn’t a case like others I’ve seen where the number of analysts is next to none: CNN Business, YF, and Zacks are citing 8, 8, and 3.

I am forecasting EPS growth just below the long-term range (mean of 5 estimates: 8.4%).

My Forecast High P/E is 24. Over the last 10 years, high P/E has ranged from 24.3 in ’15 to 56 in ’21 with a last-5-year average of 40. I am forecasting below the range.

My Forecast Low P/E is 15. Over the last 10 years, low P/E has ranged from 16.8 in ’20 to 37.2 in ’21 with a last-5-year average of 24.2. I could forecast below the range with 16, but the resultant Low Stock Price Forecast would only be 17.4% below the previous close [rule of thumb is 20%]. I am forecasting even lower.

My Low Stock Price Forecast is the default value of $42.90. This is 22.6% less than the previous closing price and 11.9% less than the 52-week low.

Over the last 10 years, Payout Ratio has ranged from 36.4% in ’22 to 98.6% in ’17 (possibly an upside outlier) with a last-5-year average of 55.8%. I am forecasting just below the range at 36%.

These inputs land RBA in the HOLD zone with an U/D ratio of 2.9. The Total Annualized Return (TAR) is 13%.

PAR (using Forecast Average—not High—P/E) is 9%, which is less than I seek for a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I will use TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 14 studies done (7 studies with outliers excluded) in the past 90 days, mean averages for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 9.2%, 9.9%, 35, 23, and 61.2%. I am lower on everything except sales growth. MS high and low EPS are $3.92 and $2.09 compared to my $3.83 and $2.86. My low EPS may be greater than MS because EPS jumped 110% in ’22 and some studies use the ’21 number (with ’22 not yet completed). My high EPS is less due to a lower forecast growth rate (I’m surprised the difference isn’t larger). MS has a Low Stock Price Forecast of $36.10. This is 15.9% lower than mine although the default MS low price would be higher: 23 * $2.09 = $48.07. Value Line projects an average annual P/E of 25 compared to MS 29 and my 19.5.

A robust MOS underlies this study, and I would be a buyer under $55/share.