EUR 850.00 For Business Accounts Only

Morningstar | Mixed Deal Flow and Modest GTV Growth Pressures RBA’s Profitability in 1Q; Shares Remain Overvalued

Ritchie Brothers’ stock declined approximately 5% after first-quarter earnings of $0.17 missed consensus estimates of $0.22. Gross transaction volume (GTV) was up 3% on a constant currency basis from the first quarter of 2018, which is below our annual estimate of 4.5%. Given its wide geographic exposure and lumpy nature of deals with seller price guarantees, we are not overly concerned with the EPS miss. We continue to be very impressed with the company’s implementation of machine-learning-based pricing algorithms and the rollout of its SAGE sales platform. Yet, with all the new initiatives the company has embarked on recently, including expanding lower-value auctions on GovPlanet, we would expect GTV to be growing more rapidly to justify its current trading price, which we feel is approximately 14% overvalued. As such, we maintain our $29 fair value estimate.

Ritchie Brothers is currently managing a delicate balancing act as it tries to grow GTV without sacrificing seller fees, which vary from deal to deal. The strong economy in North America with high equipment utilization rates has put pressure on its business model. This partially explains why inventory revenue, where Ritchie bears risk by purchasing equipment outright, increased 248% in the United States year over year. Despite the enhanced sophistication of its procurement activities where Ritchie now employs machine learning to price individual deals, it may have misjudged the potential profitability of these transactions.

Balancing online and live auction revenue streams is another tricky act that Ritchie is managing reasonably well. After harmonizing seller fees last year, management now plans to do the same with buyer fees in 2019. Online GTV in the quarter was up 8.8% while live auction GTV was down 0.2%. Ritchie continues to add online and mobile functionality to its live auctions, which has led to greater fraction of online winning bidders at its live auctions, which increased to 60% from 56%.

On the first-quarter earnings call, management reiterated its goal to grow EPS at single- to double-digit rates in the future. After attending the investor workshop at a Ritchie Brothers' in April, where analysts could evaluate front- and back-office operations and technology, we walked away very impressed. The leadership team has an excellent strategy in place to maximize the value of its different channels by reaching out to new categories of sellers without cannibalizing its core live auction business. Yet, the rapid growth of Marketplace-E may signal a slight dilution of the firm’s larger value proposition that provides certainty of transactions. Unlike its primary online channel, IronPlanet, Market-E allows sellers to have control over pricing and timing of sales. While we forecast an 11% average EPS growth over the next five years, we believe the Street is valuing its earnings expansion too richly at a forward P/E multiple of 26 times.