Investors in industrial equipment marketplace Ritchie Bros. Auctioneers Inc. are hoping the stock will start to regain lost ground after the company announced an acquisition to expand its international footprint and further capitalize on the expected global economic recovery.
Late Sunday, Burnaby, B.C.-based Ritchie Bros., the world’s largest heavy equipment auctioneer, announced a deal to buy Euro Auctions, a smaller equipment seller based in Ireland, for US$1.08-billion in cash.
In an interview, Ritchie Bros. chief executive officer Ann Fandozzi called it a “scale play in Europe” that will also improve the company’s digital services and inventory management systems, which have become critical since the pandemic.
And while the industry has been held back by a tight supply environment due to low inventory levels and supply-chain setbacks, Ms. Fandozzi is confident more equipment will come to market soon. She also points to the massive infrastructure spending plans of countries such as the United States – which accounts for about half the company’s revenues – as future catalysts for revenue growth.
“We know the stimulus is coming for infrastructure [and] that’s only going to up the ante on the entire size of the prize, giving us a lot of confidence into what’s ahead,” she said, adding that is why the company just increased its quarterly dividend 14 per cent to 25 cents a share.
Ritchie Bros. shares closed up 1.6 per cent Monday to US$59.21 on the New York Stock Exchange and up 2 per cent to $74.55 on the Toronto Stock Exchange. However, the stock is still down about 25 per cent from its all-time highs reached in November.
The shares surged at that time, alongside other so-called “recovery stocks,” amid news that COVID-19 vaccine rollouts had helped companies start planning their reopenings. “As the economy was reopening, companies like Ritchie Bros. benefited … because they were able to do deals and saw increased demand for their equipment overall,” said Brooke Thackray, a research analyst with Horizons ETFs Management (Canada) Inc., adding that many cyclical companies such as Ritchie Bros. have since pulled back as investors wait to see how quickly the recovery will happen.
In the meantime, analysts had mixed reactions to the Ritchie Bros. acquisition. Baird Equity Research analyst Craig Kennison, who has an “outperform” rating (similar to buy) and US$70 price target on the stock, said he likes how the addition of Euro Auctions will expand the company’s presence in places such as the U.K. and Europe.
However, he suggested it was highly priced. “Good deals do not come cheap,” he wrote in a note, saying Ritchie Bros. is paying about 18.8 times earnings before interest, taxes, depreciation and amortization (EBITDA) before synergies. “For context, Ritchie Bros. closed Friday trading near 18 times 2021 EBITDA.”
Raymond James analyst Bryan Fast, who has a “market perform” recommendation (similar to hold) and US$63 price target on the stock, said Euro Auctions is “a way for Ritchie Bros. to accelerate growth and continue to build scale.” While Euro Auctions is a smaller company, he noted that its gross transaction value is growing “at a relatively faster pace.”
National Bank Financial analyst Maxim Sytchev increased his price target to US$65 from US$62 Monday but maintained his “sector perform” rating (similar to hold), stating that he’s “not chasing the shares.” “We view the deal as marginally accretive to our forecasts and [management’s] conference call [on Monday] reaffirmed our thoughts that the tightness of the used equipment market is very much still with us,” he wrote in a note.
William Blair analyst Lawrence De Maria downgraded the stock to “market perform” from “outperform” after the stock’s initial 5-per-cent boost early Monday on news of the deal and after weaker-than-expected second-quarter earnings reported Friday.
Ritchie Bros. reported revenue of US$396.4-million for the quarter ended June 30, up 2 per cent from a year earlier but below expectations of US$420-million, according to S&P Capital IQ estimates. Net income rose 15 per cent year over year to US$60.7-million, while earnings per share increased 12 per cent to 55 US cents a share. Analysts were expecting earnings to come in at 61 US cents a share.
“Ritchie has gone from a great year during the height of COVID, with a sensible, long-term strategic plan, to an underperformer with limited visibility,” Mr. De Maria wrote in a note, adding that investors have been “urging” the company for more information on its outlook “but only with limited success, and we sense [and] share a growing frustration.”
Ms. Fandozzi said the company historically hasn’t provided quarterly guidance – choosing three-to-five-year outlooks instead – because the business can sometimes be “lumpy” and that “can be misleading if you look at it on a quarterly basis.” She points to the current supply-chain issues, with manufacturers having trouble getting new equipment into the marketplace because of chip shortages and other problems.
“As a result, you can’t get a new piece of equipment – you’re definitely not going to part with the old piece of equipment,” she said. “It’s not a great environment when you have a low supply-chain environment, but it’s out of our control. And it’s a point in time.”
She’s confident the company will see longer-term benefits when the supply-chain issues are resolved and once infrastructure spending kicks into high gear, “which is only going to mean additional goodness for us.”
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