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Impressed by Ritchie Bros.? Don't buy yet

Buyers and staff at a Ritchie Bros. Auction in Bolton, Ont.

Kevin Van Paassen/The Globe and Mail

The share price of Ritchie Bros. Auctioneers Inc. jumped by more than 7 per cent on Tuesday after the company beat second-quarter earnings expectations and raised its dividend.

Yet, analysts are cautioning against buying into the world's largest industrial auctioneer until it can show more revenue growth amid a sluggish global recovery.

"I think people have time to wait on this one," said Credit Suisse analyst Hamzah Mazari, attributing Tuesday's stock jump largely to short-sellers covering their positions and low expectations for the stock.

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Ritchie Bros. lowered guidance on a couple of key measures Tuesday. The Burnaby, B.C., company also said it was cautious about counting on an economic upturn in the United States, where half of its business takes place, to bolster its bottom line.

"It's murky out there and it's still murky, and I think a lot of companies are finding the same kind of challenge," Ritchie Bros. chief executive Peter Blake told investors on a conference call.

The company started in Kelowna, B.C., in the late 1950s when three Ritchie brothers took over their father's furniture store and auctioned off some of its contents to pay a bank loan.

It has grown to become a global auctioneer of industrial equipment with 110 locations worldwide, but its share price has faltered as clients have moved to save money by holding on to equipment for longer periods, which translates into lower revenues for the auction company.

Ritchie Bros. is also facing increasing competition from equipment owners and dealers that want to avoid paying auction commissions and are using the Internet and other means to sell machinery on their own.

The company has responded with its own online platforms. It has also moved away from its traditional role as a middleman and is buying equipment and selling it on its own.

Ritchie Bros. said some of its recent revenue disappointments stem from hiring a record number of junior managers, who lack the sales contacts of their more senior counterparts and have been a drag on productivity.

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"This was a challenging quarter for the business as we dealt with both aging equipment supply and a less tenured sales force," Mr. Blake said.

The company derives most of its revenue from a commission on the gross sales that take place at its auctions. Its gross auction proceeds (GAP) fell 10 per cent to $1.1-billion (U.S.) in the April-June quarter, as compared with the same time last year.

On Tuesday, Ritchie Bros. lowered its GAP guidance to between $3.6-billion and $3.8-billion, from $4-billion to $4.4-billion. It also eased down its annual revenue expectations to $430-million to $460-million, from $460-million to $500-million.

Net earnings for the second quarter fell 4 per cent to $30-million compared with a year earlier, and earnings per share were down a penny to 28 cents. Analysts had been looking for earnings of 27 cents per share, according to estimates compiled by Thomson Reuters.

The company also raised its quarterly cash dividend by 6 per cent, to 13 cents per share starting in September. The stock closed up $1.43 (Canadian) to $20.74 on the Toronto Stock Exchange.

In recent years, the stock has traded in line with the mining and construction industries, reaching highs near $30 per share in both mid-2008 and 2011, when those sectors were at their heights.

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Analysts say the company is facing a lacklustre economic climate.

"Everyone [is] waiting for the big inflection point to happen in the U.S. construction market – I don't think that's occurred just yet," said Raymond James analyst Ben Cherniavsky.

In a recent note, Mr. Cherniavsky said there are strategies that management could use to help increase shareholder value, but "we have grown rather impatient waiting for them to transpire. Consequently, we think it is best to put this story in the 'show me' file for now."

Other analysts see now as a good entry point for longer-term investors given Ritchie's position as the world's largest seller of construction equipment.

"I still believe in the model. I still believe we'll get through some of these cyclical measures," said William Blair & Co. analyst Nate Brochmann.

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