RBA Stock Study (8-15-23)

Posted by Mark on October 31, 2023 at 06:46 | Last modified: August 15, 2023 11:33

I recently did a stock study on RB Global, Inc. (name changed but ticker remains RBA) with a closing price of $58.14. Previous studies are here and here.

M* writes:

     > RB Global Inc. 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. RB Global Inc. 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.

Over the past decade, this medium-size company has grown sales and EPS at annualized rates of 18.1% and 10.7%. Lines are generally up and parallel except for EPS declines in ’14, ’16, ’17, and ’21. PTPM remains above peer and industry averages, declining from 28.8% in ’13 to 12.7% in ’17 and rebounding to 23.4% in ’22 with a last-5-year mean of 16.5%.

Also over the past decade, ROE is solidly above peer and industry averages and stable (except for a spike to 25.6% in ’22) with a last-5-year mean of 18.0%. Debt-to-Capital is generally lower than the industry but higher than peer averages with a last-5-year mean of 47.5%.

Quick Ratio is 0.99 but Interest Coverage is only 2.9 [versus 8.4 in ’22—possibly due to Mar ’23 IAA acquisition that also causes a disconnect with many of the numbers below]. Value Line rates the company B++ for Financial Strength and M* gives a Standard rating for Capital Allocation: “the company’s low balance sheet risk is largely due to its manageable debt levels and access to credit lines.”

With regard to sales growth:

• CNN Business projects YOY 106% and 57.2% for ’23 and ’24, respectively (based on 7 analysts).
• YF projects YOY 109% and 16.5% for ’23 and ’24, respectively (7 analysts).
• Zacks projects YOY 106% and 19.6% for ’23 and ’24, respectively (4).
• Value Line projects 23.6% annualized growth from ’22-’27.
• CFRA gives ACE of 108% YOY and 56.3% per year for ’23 and ’22-’24, respectively (7).
• M* offers a 2-year ACE of 79.5% annualized growth.

As mentioned above, acquisition of U.S. auto retailer IAA Inc., which completed on March 20 (see https://www.reuters.com/markets/deals/ritchie-bros-completes-acquisition-iaa-2023-03-20/), explains the lofty growth rates. I am forecasting conservatively below the range at 10.0% per year.

With regard to EPS growth:

• CNN Business projects contraction of 1.2% YOY for ’23, 8.9% growth per year for ’22-’24 (based on 7 analysts), and 5-year annualized growth of 7.0%.
• MarketWatch projects growth of 7.4% YOY and 12.5% per year for ’23 and ’22-’24, respectively (10 analysts).
• Nasdaq.com projects 132% YOY growth for ’24 (2).
• Seeking Alpha projects 4-year annualized growth of 7.0%.
• YF projects YOY growth of 4.1% and 18.3% for ’23 and ’24 (6), along with 5-year annualized growth of 7.0%.
• Zacks projects YOY growth of 7.1% and 17.1% for ’23 and ’24 (5), along with 5-year annualized growth of 7.0%.
• Value Line projects 11.5% annualized growth from ’22-’27.
• CFRA projects 12.9% YOY contraction and 4.6% growth per year for ’23 and ’22-’24, respectively (6).

Unlike sales, no bump in estimated EPS for ’23-’24 is projected (except for Nasdaq.com, which is strange).

I have data duplication concerns because four of five long-term estimates are identical [to the hundredths place on the actual websites]. CNN Business and Seeking Alpha get data from FactSet and S&P Global, respectively. YF gets data from Refinitiv, and Zacks is its own entity. Given different sources, I would not expect duplication unless [some of] the same analysts are being used by multiple sources. Neither is this a case where the number of analysts is an extreme few: CNN Business, YF, and Zacks are citing 7, 6, and 5.

I am forecasting EPS growth below the long-term-estimate range (mean of five: 7.9%) at 6.0% per year. With ’22 EPS up over 100% YOY to $2.86/share and 2023 Q2 EPS at $0.92/share (annualized), I will lean toward the former but use Value Line’s $2.41 instead. This results in a 5-year forecast of 2.41/share * (1.06 ^ 5) = $3.22/share, which is effectively a 2.4% growth rate on M*’s $2.86/share.

My Forecast High P/E is 25.0. Over the past decade, high P/E has ranged from 24.3 in ’15 to 56.0 in ’21 with a last-5-year mean of 40.0. The last-5-year-mean average P/E is 32.1. I am forecasting near the bottom of the range (only ’15 is lower).

My Forecast Low P/E is 15.0. Over the past decade, low P/E has ranged from 16.8 in ’20 to 37.2 in ’21 with a last-5-year mean of 24.2. I am forecasting near the bottom of the range (only ’20 is lower).

My Low Stock Price Forecast (LSPF) of $41.00 is default based on $2.41/share initial value. This is 29.5% less than the previous closing price and 15.8% less than the 52-week low.

Over the past decade, Payout Ratio has ranged from 36.4% in ’22 to 98.6% in ’17 (possibly an upside outlier) with a last-5-year mean of 55.8%. I am forecasting just below the range at 36.0%.

These inputs land RBA in the HOLD zone with a U/D ratio of 1.3. Total Annualized Return (TAR) is 8.2%.

PAR (using Forecast Average—not High—P/E) is 4.8%, which is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on the 8.2% total annualized return (TAR) instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 15 studies (my study and 9 other outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 15.0%, 9.0%, 31.0, 22.4, and 55.8%. I am lower across the board. Value Line’s projected average annual P/E of 24.0 is lower than MS (26.7) and higher than mine (20.0).

MS high / low EPS are $3.65 / $0.98 vs. my $3.22 / $2.41 (per share). I think EPS numbers under $1.00/share are due to the acquisition and to be excluded, which would render that unreasonable to use.

The MS sample size is too small upon which to base valid comparisons, but I will continue for the sake of completeness.

MS LSPF of $41.60 implies a Forecast Low P/E of 42.4 vs. the above-stated 22.4. MS LSPF is 89.5% greater than the default $0.98/share * 22.4 = $21.95, which results in much more aggressive zoning [this clearly reflects a disconnect, which I say is the unreasonable $0.98/share]. MS LSPF remains 1.5% greater than mine.

My TAR (over 15.0% preferred) is much less than the 17.2% from MS. MOS in the current study seems to be robust.

I track a few different valuation metrics. PEG is 3.2 and over 10.0 per Zacks and my projected P/E, respectively: both extremely overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is overvalued at 1.97. Kim Butcher’s “quick and dirty DCF” prices the stock at 20.0 * [$5.25 – ($1.50 + $1.75)] = $40.00 thereby suggesting the stock to be overvalued by 45.0%. This is the first time I have seen unanimous agreement among the four different calculations.

While the BUY zone tops out at $50/share, I would seek a much lower cost basis to approach a 15.0% TAR. This is also to heed Value Line’s advice from a previous report: “the integration risks and added debt load associated with the acquisition mean more conservative investors will likely want to proceed cautiously.”

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