RBA Stock Study (5-23-23)

I recently did a stock study on Ritchie Bros Auctioneers Inc. (RBA) with a closing price of $56.35. The original study can be seen here.

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-size 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 with a last-5-year average of 16.5%.

Over the last 10 years, ROE has been relatively stable except for a spike to 25.6% in ’22. ROE has remained mostly above peer and industry averages with a last-5-year average of 18.0%. 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 0.98 but Interest Coverage is only 3.7 [versus 8.4 in ’22—possibly due to Mar ’23 IAA acquisition]. 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.”

I forecast long-term sales growth of 10.0% based on the following:

• CNN Business projects YOY 106% and 20.0% for ’23 and ’24, respectively (based on 8 analysts).
• YF projects YOY 104% and 17.9% for ’23 and ’24, respectively (8 analysts).
• Zacks projects YOY 101% and 18.3% for ’23 and ’24, respectively (3).
• Value Line projects 23.1% annualized growth from ’22-’27.
• CFRA gives YOY ACE of 97.8% and 21.2% for ’23 and ’24, respectively (6).
• M* offers a 2-year ACE of 79.2% annualized growth.

As mentioned above, acquisition of U.S. auto retailer IAA Inc., which completed on March 20 (see here), explains the lofty growth rates. I am forecasting conservatively below the range.

I forecast long-term annualized EPS growth of 6.0% based on the following:

• CNN Business projects contraction of 3.7% YOY for ’23, 6.6% growth per year for ’22-’24 (based on 8 analysts), and 5-year annualized growth of 7.0%.
• MarketWatch projects growth of 0.9% YOY and 9.1% per year for ’23 and ’22-’24, respectively (10 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 7.0%.
• YF projects YOY growth of 8.7% and 13.4% for ’23 and ’24, respectively (6), along with 7.0% annualized growth for the next five years.
• Zacks projects YOY growth of 17.8% and 16.2% for ’23 and ’24, respectively (3), along with 7.0% annualized growth for the next five years.
• Value Line projects 11.2% annualized growth from ’22-’27.
• CFRA projects contraction of 10.3% YOY and 0.4% per year for ’23 and ’22-’24, respectively (6).

I am not seeing the bump in estimated EPS for ’23-’24 like I do 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 entity. Given different sources, I would not expect duplication unless [some of] the same analysts are being used by multiple sources. Even at that, this isn’t a case where the number of analysts is an extreme few: CNN Business, YF, and Zacks are citing 8, 6, and 4.

I am forecasting EPS growth just below the long-term-estimate range (mean of five: 7.8%). As Q1 ’23 EPS is $0.98/share (annualized), I will project from the ’22 EPS of $2.86/share. This should be [relatively] consistent with analysts.

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 am forecasting below the range.

My Low Stock Price Forecast (LSPF) is the default [using $2.86/share] value of $42.90. This is 23.9% 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 36.0%.

These inputs land RBA in the HOLD zone with an U/D ratio of 2.6. Total Annualized Return (TAR) is 11.8%.

PAR (using Forecast Average—not High—P/E) is 7.6%, which is less than I seek for a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 26 studies (my study and 15 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 14.0%, 8.8%, 31.0, 23.4, and 56.6%. I am lower across the board. Value Line’s projected average annual P/E of 24.0 is lower than MS (27.2) and higher than mine (19.5). MOS in this study appears to be robust.

With regard to EPS, MS high and low are $4.17/share and $1.17/share in contrast to my $3.83 and $2.86. Twelve MS studies use $0.98/share or less for low EPS. I think this is extreme. Looking at the Q1 2023 10-Q, the income statement shows an additional $116.2M “acquisition-related and integration costs” in ’23 vs. ’22. Excluding this, the $0.28/share quarterly loss becomes $0.68/share quarterly profit or $2.72/share annualized, which is close to mine. As for high EPS, mine is lower than MS due to forecast EPS growth rate.

MS LSPF of $38.70 is 9.8% less than mine, implies a Forecast Low P/E of 33.1 (versus the above-stated 23.4), and is 41.4% higher than the $1.17 * 23.4 = $27.38 default. The latter are big discrepancies probably resulting from an extreme low EPS.

While the BUY zone tops out at $55/share, I would look to establish a position under $50 to get closer to a 15.0% TAR. This is also to heed Value Line: “the integration risks and added debt load associated with the acquisition mean more conservative investors will likely want to proceed cautiously.”