Chris Farrer, a telecommunications expert for Ritchie Bros, at work on the Ritchie Bros. auction property in Chilliwack, B.C. Canada generates about 29 per cent of the company’s revenue.Rick Collins/The Globe and Mail
Investors not intimidated by an expensive stock valuation are eyeing Ritchie Bros. Auctioneers Inc. as a way to play the industrial side of the recovering North American economy.
Shares of the world's largest auctioneer of heavy equipment and trucks are up about 30 per cent over the past year, outpacing the broader markets, and some analysts see more growth coming.
The company recently hired a new chief executive officer and proceeds from its auctions of items such as used forklifts and tractors are on the upswing.
Still, the stock isn't cheap, trading at about 24 times next year's earnings, which is keeping some buyers at bay.
"The valuation may be a bit stretched for some investors," says Stan Wong, director of wealth management and portfolio manager at ScotiaMcLeod. He doesn't own the stock in his funds right now for that reason.
"It's a hard sell," said Barrington Research analyst Gary Prestopino, who has a "market perform" on the stock, which is similar to a "hold."
"If you can get over the fact you are paying a mid-20s multiple for this name I think it will work its way higher over time."
The analyst consensus price target for Ritchie Bros. over the next year is $24.14 (U.S.), according to S&P Capital IQ. That is around where the stock is currently trading on the New York Stock Exchange. (Ritchie Bros. is also listed on the TSX.)
The shares have bounced back from a 52-week low around $18 in October, after the company said its CEO Peter Blake was stepping down in mid 2014 after 10 years in the role. He recently accepted a job at WesternOne Inc. and was replaced this month at Ritchie Bros. by Ravi Saligram, the former CEO of OfficeMax, who has also worked in the hotel and food service industries.
It's too soon to judge Mr. Saligram's performance, but analysts like that he has experience running companies with businesses in many different locations.
Ritchie Bros. operates 44 auction sites in more than 25 countries. About 48 per cent of its revenue is generated in the U.S., 29 per cent in Canada, and 23 per cent in Europe and other parts of the world. Analysts say it controls about 30 to 40 per cent of the $10-billion global auction market.
Cantor Fitzgerald analyst Peter Prattas upgraded Ritchie Bros. to "buy" from "hold" in June and hiked his price target to $26 (U.S.) from $24, citing increased momentum in auction proceeds.
"It's becoming a growth company once again," Mr. Prattas said.
He noted that gross auction proceeds are up 9 per cent from January to June this year, compared with the same time last year, which is closer to its annual double-digit growth before the last recession.
Mr. Prattas sees the recovering U.S. economy as "arguably their biggest opportunity for growth in the short term."
Robert W. Baird & Co. analyst Craig Kennison said the company is also boosting its productivity and sees growth in its online marketplace called EquipmentOne.
"We like the business model and can construct a compelling bull case," Mr. Kennison said in a note. He has an "outperform" on the stock and $29 target price.
Among 17 analysts that cover the stock, six have a "buy" or equivalent recommendation, nine say hold and two say "sell," according to Bloomberg.
TD Securities analyst Cherilyn Radbourne is in the "sell" camp, noting Ritchie Bros. is having trouble matching its growth rate from before the recession.
"We have always liked Ritchie Bros.' business model, first-mover advantage, and experienced management team," Ms. Radbourne said in a note. "Our 'reduce' rating is largely predicated on valuation. We are concerned that the stock carries a premium multiple, which reflects the company's historical earnings growth rate.