Published:
July 7, 2008
Ritchie Brothers
Auctioneers (NYSE: RBA,
$25.77) is the largest
auctioneer of used industrial and agricultural equipment in the
world. RBA hosts auctions and earns fees based mainly on the
sale prices achieved at those auctions. RBA owns a total of 38
auction sites in 27 countries and allows bidders to bid on
equipment at auction over its website as well.
Catalyst(s): The agriculture, mining and oil
and gas businesses are booming globally. The prices of wheat,
soybeans, corn and other basic food commodities are surging to
new multi-year highs. There are two main drivers of this trend:
rising consumption of agricultural commodities in emerging
markets and increased consumption of crops for biofuels
production.
The developing world is also driving demand for petroleum
products and other raw materials. A building boom in China, for
example, is driving demand for steel, copper and aluminum used
in building construction. Meanwhile growing consumer incomes
mean car sales are surging, powering strong growth in demand
for oil.
One problem holding back these industries in recent years is a
shortage of equipment. Mining firms have been plagued by a lack
of available earth-moving and subsurface mining equipment. And
agricultural products producers need tractors, combines and
other equipment that are in short supply globally to efficiently
run their farms.
With global manufacturers
already maximizing production, the market for second-hand
equipment is booming. In many cases, buying used mining and
farming equipment can be a far cheaper and more expedient means
of getting much-needed equipment. The high demand for equipment
has pushed up prices and increased the number of firms looking
to buy used industrial and agricultural machines. Since RBA is
paid based on the value of products sold at its auctions, this
spells steady growth in fee revenues.
In addition, RBA is actually benefiting from the slowdown in the
U.S. property market. Specifically, homebuilders and construction
firms in the U.S., facing a slowdown, now have plenty of surplus
construction and earth-moving equipment left over from the
recent property boom. Some smaller players are also looking to
raise cash to shore up finances and selling surplus equipment is
an easy way to earn some quick cash.
Meanwhile, property and construction markets are still booming
in places like the Middle East and Asia. Builders in these
markets are more than happy to snap up surplus used equipment in
the U.S. RBA has buyers in 170 countries and recently opened up
sites in Dubai and Singapore to capitalize on demand from the
Middle East and Asia respectively.
Competitive Advantages: The
company estimates that it has close to 80,000 registered buyers
in 170 countries worldwide and has a total of 38 auction sites
around the world. RBA also has plans to open up two to three new
auction sites each year, mainly in fast-growing foreign
locations.
RBA benefits from a classic network effect. The company has the
largest network of auction sites, the largest number of
registered buyers and the widest assortment of equipment for
sale of any firm in the industrial auction business. Sellers
want to list in RBA auctions because they know the firm will
expose their equipment to the widest selection of potential
buyers; this guarantees a fair price. And buyers want to bid at RBA auctions because they know that's where the widest
assortment of equipment can be found.
In addition, RBA is large enough to offer buyers and sellers
specialized services. For example, RBA typically guarantees a
minimum price for sellers; smaller competitors may well be
unable to offer that guarantee. It would be tough for
competitors to enter RBA's market as it takes years to build
auction sites and establish large lists of likely bidders and
sellers.
Valuation and Outlook: RBA trades at 26
times next year's earnings estimates and has a long term
projected growth rate of around +18%. That means that RBA trades
at roughly 1.4 times its long-term earnings growth rate.
That's not overly expensive for a firm with a market-leading
position such as RBA. And RBA has actually been growing at
closer to +21%
annualized over the past five years, thanks to the strong
growth drivers in the industrial, mining and agriculture
businesses. Therefore, that +18% long-term projected growth rate
looks like conservative estimate.
And we see RBA continuing to grow faster than the auction market
in general. While RBA is the largest auctioneer in its niche,
management estimates that the market for used industrial
equipment is about $100 billion annually and RBA only controls
3% of that market. Most of its competitors are smaller players
without the network and scale advantages RBA has. RBA has room to grow by simply
grabbing more of its existing market over time. With all this in mind, RBA is a solid "Buy"
under $35 per share, with the potential to appreciate more than
+36%.
Paul Tracy
Editor
StreetAuthority
Market Advisor
About the Market Advisor
This monthly investment newsletter is
a highly diversified service -- the Market Advisor covers income
investments, undervalued stocks, aggressive growth plays, international
investments, exchange-traded funds (ETFs), and just about everything else in
between. As a result, you're certain to find a variety of investing ideas that
are well suited for your portfolio. (Learn
More)
About Paul Tracy
Paul Tracy co-founded StreetAuthority.com and became the firm's
Chief Investment Strategist in 2001. He also co-founded TopStockAnalysts.com in
2006. Prior to that he spent several years as Managing Editor at a multi-million
dollar financial publishing firm with over 150,000 subscribers. In addition to
his role as managing editor and lead financial writer, he was also responsible
for equity research and managing a team of seasoned professional financial
writers, researchers and market commentators.
Paul's previous experience includes a position at Robert W. Baird & Co.'s
full-service brokerage operations as well as economic research work on a Money
and Banking project funded by the National Bureau of Economic Research. He has
also spent time doing outside consulting and research for the University of
Virginia, has appeared as a guest expert on several prominent financial radio
shows, and has been a featured speaker at various investment conferences across
the U.S.
Paul graduated with a B.S. in Finance and Management from the McIntire School
of Commerce at the University of Virginia.
To learn more about Paul Tracy's premium investing newsletter -- the
Market Advisor -- please visit
this link.
|
