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The Globe and Mail

Rocky Mountain Dealerships: reaping profits through consolidation

Tim Smith/The Canadian Press

Rocky Mountain Dealerships Inc., one of the world's largest vendors of tractors and combines, is an intriguing bet for investors who want exposure to the booming agricultural sector without directly betting on crop prices.

The Calgary-based company has staked its future on being a consolidator, a company that acquires smaller rivals to spur long-term profit growth. The basic idea is simplicity itself: Bigger is usually better.

The agricultural equipment dealership business remains highly fragmented, with many small mom-and-pop operators who could easily be rolled into a larger company to achieve efficiency gains. More heft allows a company to spread around its overhead costs and get improved economies of scale, leading to savings that fatten the bottom line.

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Rocky Mountain, with operations selling the Case brand of farm and construction equipment in the three Prairie provinces, has been expanding through acquisitions since going public in late 2007, a period over which revenues, boosted by takeovers, have nearly tripled to about $1-billion. Earnings have soared too. In this year's third quarter alone, profit of $8.5-million nearly equalled the entire $9.9-million it was making in the full year before going public.

Rocky Mountain chief financial officer David Ascott said he expects equipment sales to remain buoyant, driven by increasing wealth on farms because of high crop prices and increasing demand for food caused by global population growth and improving diets.

The company doesn't give earnings guidance, but Mr. Ascott said farmers are a prosperous bunch these days, with good balance sheets and bins full of crops that are receiving top prices. "If you feel rich, you're going to spend more on equipment," Mr. Ascott says of the mood among farmers.

About 90 per cent of Rocky Mountain's revenue comes from the agricultural sector and 10 per cent from construction equipment.

Rocky Mountain made two purchases of smaller rivals this year. In November, it completed a deal for an Alberta farm dealership with $20-million in annual revenue¬Ę and earlier in the year it plucked up another with $54-million in revenue.

Mr. Ascott says the company isn't running out of acquisition targets, giving the consolidation strategy more room to run. There are about 20 independent dealers on the Prairies selling Case products, ranging from single-store family operations to mini-chains with five or six outlets.

Many of the small independent dealerships Rocky Mountain is now acquiring were created in the early 1990s, when Case, a unit of manufacturing giant Fiat, sold its company-owned outlets to local entrepreneurs. Some of those owners are now in their 60s and 70s, "and are looking for an exit strategy," according to Mr. Ascott.

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Rocky Mountain itself was founded by two dealers, chief executive officer Matt Campbell and president Derek Stimson, who together own more than 20 per cent of the shares.

In the United States, a similar move to consolidate Case dealerships is under way by Titan Machinery. But Rocky Mountain seems the better buy, with the stock price less expensive compared to its earnings. It is trading at a discount to its U.S. rival, at at trailing 12-month price-to-earnings multiple of nine, compared to Titan's 11.

According to Rocky Mountain's latest annual report, newly acquired stories typically have a profit margin on sales of between 8 per cent and 12 per cent. Because of the efficiencies due to its larger size, Rocky Mountain is able to achieve a rate of more than 15 per cent.

Still, the business does have its challenges. A recent report from Raymond James, which gives the company a "market perform" rating, warned that new equipment inventories are growing and complained about the slow pace of profit gains from recent consolidation efforts.

But Mr. Ascott played down the concerns, saying the company took on inventory to meet fourth-quarter demand, its peak selling period.

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