Has Ritchie Bros. Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Ritchie Bros. Auctioneers (NYSE: RBA  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Ritchie Bros..

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

7.8%

Fail

 

1-Year Revenue Growth > 12%

12.9%

Pass

Margins

Gross Margin > 35%

88.3%

Pass

 

Net Margin > 15%

19.6%

Pass

Balance Sheet

Debt to Equity < 50%

38.1%

Pass

 

Current Ratio > 1.3

1.22

Fail

Opportunities

Return on Equity > 15%

13.0%

Fail

Valuation

Normalized P/E < 20

29.91

Fail

Dividends

Current Yield > 2%

2.3%

Pass

 

5-Year Dividend Growth > 10%

10.0%

Pass

       
 

Total Score

 

6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Ritchie Bros. last year, the company picked up two points, with a nice rise in revenue accounting for much of the gain. Yet the stock has had much more muted gains of just 5% over the past year.

Ritchie holds auctions around the world, with recent auctions everywhere from Australia, the Netherlands, and the U.K., to the U.S. and Canada. Yet neither famous live luxury auctioneer Sotheby's (NYSE: BID  ) nor online auction giant eBay (Nasdaq: EBAY  ) are really competitors, because Ritchie confines itself primarily to high-ticket heavy industrial and agricultural equipment.

Recently, that business has been very strong. Yesterday, the company announced a record third quarter for sales, with auction bidding of nearly $850 million translating to $92 million in auction revenues and a 48% jump in adjusted net income, excluding a one-time impairment loss. CEO Peter Blake said he anticipates further growth as supply and demand reach a better balance. Previously, with good conditions in mining and agriculture, many buyers would simply buy new Caterpillar (NYSE: CAT  ) or Deere (NYSE: DE  ) equipment. But with a global economic slowdown taking shape, demand has cooled enough for conditions to improve for Ritchie.

Ritchie has identified a huge potential market in China. Although the company has struggled to get regulatory approvals there, it still anticipates having its first auction in China by early next year.

For Ritchie to keep improving, executing on its plans in China while continuing to take advantage of mining and agricultural demand around the world will be essential in order to get earnings high enough to justify the stock's current valuation. If it can keep delivering, though, Ritchie Bros. has plenty of opportunity to get closer to perfection in the years ahead.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Ritchie Bros. gets good demand for selling Caterpillar equipment for a reason: Caterpillar is the market share leader in an industry in which size matters, and its quality products, extensive service network, and unparalleled brand strength combine to give it solid competitive advantages. Read all about whether Caterpillar is a buy as well as its strengths and weaknesses in our brand new report. Just click here to access it now.

Click here to add Ritchie Bros. to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Sotheby's, eBay, and Ritchie Bros. Auctioneers. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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