Ritchie Bros. Auctioneers (RBA) (TSE: RBA) shares have rewarded investors notably over the past decade, with the company’s growth strategy expanding its presence in the auctions industry. While the business model appears interesting and the company’s capital return track record is definitely impressive, RBA’s valuation is likely too expensive to justify allocating capital to the stock now. Accordingly, I am neutral on the stock.
Ritchie Bros. Auctioneers is a world leader in auctions and disposition technologies for commercial assets, dealing $5.5 billion of used equipment and other assets last year.
Through its unreserved auctions, online marketplaces, listings, and private brokerage services, Ritchie Bros. sells a wide range of predominantly used commercial and industrial assets as well as government surplus. These assets make up the bulk of the equipment sold by Gross Transaction Value (GTV).
The company’s customers (i.e., those selling the equipment) include end users like construction companies, equipment dealers, and original equipment manufacturers, among others.
An End-to-End Auctioning Ecosystem with Robust Expansion Prospects
Ritchie Bros.’s investment case is especially interesting since there is plenty of economic value that can be unlocked through auctions. With the company specializing in the field and controlling the whole end-to-end value chain of these transactions, it can generate cash flow on multiple fronts.
Such value-added services include equipment financing, asset appraisals and examinations, logistical services, and other supportive services, such as equipment refurbishment. Thus, Ritchie Bros.’s growth potential is massive.
Note: RBA is a Canadian company that is listed both on the NYSE and TSX. All figures in this article are in U.S. Dollars.
RBA Has Been Sustaining Its Financial Momentum
Ritchie Bros.’s performance remained very strong during the pandemic. Despite the hurdles at the time, assets being sold rapidly during peak panic time boosted the company’s GTV dollar value volumes. Its momentum remained strong last year and in Q1 of this year, as persistent supply-chain disruptions have sustained a very tight environment for equipment.
Driven by a favorable trading environment for the company, revenues grew roughly 19% year-over-year to $393.9 million in the previous quarter. Specifically, total Service revenues and Inventory Sales revenues rose 19% each.
Service revenue growth was powered by the Fees segment growing 26% and Commissions revenue climbing 12%. The growth in Fees was attributable to GTV growth of 13%, as well as the elevated buyer fee rates enforced in 2021 and early 2022.
Regarding its profitability, adjusted net income and EPS surged 42% and 44% to $50.9 million and $0.46, respectively. This was the result of higher margins due to rather stable costs of services against higher revenues. Particularly, total operating expenses rose by just 15%. Accordingly, the adjusted operating income margin stretched from 17.4% to 22.6% compared to the prior-year period.
Ritchie Bros.’s upcoming Q2 results will reveal if the company’s momentum is sustaining. Supply-chain bottlenecks have not eased in the slightest, as proven by containership rates which remain at record levels.
However, the company’s growth initiatives appear very promising. Its RBFS (Ritchie Bros. Financial Services) division, for instance, posted growth of 71% to $15.7 million in Q1, while its cumulative IMS (Inventory Management System) activations skyrocketed by 103% compared to the prior-year period.
These initiatives still account for a small chunk of total revenues, but they could accelerate the company’s performance due to their explosive growth pace.
The Dividend is Attractive, but Not at this Valuation
As Ritchie Bros.’s end-to-end auctioning ecosystem has been continuously expanding, net income and dividend payouts have been expanding as well. In fact, Ritchie Bros. has been increasing its dividend per share annually without any exception since 2004, honoring an 18-year dividend growth track record.
Last year’s 13.6% dividend hike was above the 10-year dividend per share growth CAGR of 8.3%. This may signal that management expects accelerated EPS growth moving forward.
In any case, based on consensus EPS estimates of $2.04 for Fiscal 2022, the payout ratio currently stands under 50%, which is a rather healthy level, in my view.
Despite the company’s prolonged dividend growth track record, its dividend yield is only about 1.5%, as shares have gained 17.5% over the past year. That should be a relatively unattractive yield for income-oriented and dividend-growth investors alike in a rising-rates environment, even if dividend hikes were to remain in the double digits.
Further, the consensus EPS estimate implies a P/E of about 34x at the stock’s current price levels, which I find very costly in the current environment, even if Ritchie Bros.’s current growth pace were to be sustained.
Wall Street’s Take on RBA Stock
Turning to Wall Street, Ritchie Bros. has a Moderate Buy consensus rating based on three Buys, two Holds, and one Sell rating assigned in the past three months. At $65.60, the average Ritchie Bros. price target implies 5.2% downside potential.
Conclusion: High Valuation Offsets RBA’s Great Qualities
Ritchie Bros. Auctioneers is a great company that exhibits a proven track record of robust shareholder value creation. While the company’s momentum is likely to be sustained in its upcoming earnings results, I believe shares are very expensive at their current valuation.
With the yield having been compressed significantly lower lately, dividend returns could hardly offset the risks of a possible valuation multiple compression as well. Thus, it’s likely better to avoid the stock at its current levels.
