Unique Business Model That Continues to Thrive: Ritchie Bros. Auctioneers (TSX: RBA) is world’s largest industrial auctioneer. The company provides end-to-end solutions to buy and sell used heavy equipment, trucks and other assets. The global asset management and disposition company operates through 12 countries and serves variety of sectors including construction, agriculture, oil and gas, mining, forestry, and transportation, among others. The company offers both live and online auction, which bodes well for growth even during tumultuous times.

Stellar financial performance:  Ritchie Bros has impressed with its financial performance over the past couple of years. The company’s top line rose at a double-digit rate in the last two years. In 2019, the company’s revenues increased by 13% y-o-y to US$ 1,318.64 million. The company’s solid sales growth reflected continued strength in the US region. Gross Transactional Value increased 4% to US$ 5.1 billion in the Auctions & Marketplaces (A&M) segment. The A&M segment reported revenues of US$1.2 billion, up 14% on a y-o-y basis. The company conducted 337 auctions in 2019. Operating income jumped 21% y-o-y, thanks to higher sales and cost control measures. The company’s net earnings increased 23% y-o-y to US$ 149.0 million, reflecting higher operating income coupled with a decline in interest expenses.

Source: Company Reports

Recent updates: The company’s online bidding offerings are gaining momentum. On March 19, Ritchie Bros. announced that it is witnessing a surge in number of bidders for online-only auctions. The company added that its online registrations in March increased by 25% y-o-y. Meanwhile, its mobile app users surged 90%.

Valuation Methodology: P/E Based Relative Valuation

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation: As countries around the world are following social distancing in the wake of COVID-19 outbreak, Ritchie Bros. online-only event with a live auctioneer is gaining momentum. The company is witnessing record number of bidders for online auctions, which means that dollars keeping coming despite the world avoiding large gatherings. Investors should note that a recessionary environment or an economic slowdown is unlikely to have much of an impact on the company’s business. In fact, Ritchie Bros. could witness more demand amid a slowdown as more and more customers will be willing to put money in used equipments to save cash. Moreover, an economic slowdown prompts leads to an increase in auction related activities. Ritchie Bros. stock has corrected nearly 13% on a year-to-date basis, which could be a good entry point. The company’s ability to generate strong cash flows enables it to lower debt. During 2019, the company lowered its adjusted net debt to adjusted EBITDA to 1.0x, as compared to 1.9x in 2018. We have valued the company using Price to Earnings based relative valuation methodology. Ritchie Bros. stock trades at a premium when compared to peers. However, the company’s premium valuation seems warranted given the strong business model. RBA stock is trading at a PE multiple of 25.2x, which we expect to expand further and arrived at a target price, which implies low double-digit upside (in % terms). We recommend a ‘Buy’ on RBA stock at the closing price of 48.39 on 1 April 2020.

RBA One-Year Daily Price Chart (Source: Thomson Reuters)

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