Is Ritchie Bros. Auctioneers 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. Auctioneers.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

8.2%

Fail

 

1-Year Revenue Growth > 12%

1.3%

Fail

Margins

Gross Margin > 35%

87.4%

Pass

 

Net Margin > 15%

17.2%

Pass

Balance Sheet

Debt to Equity < 50%

21.9%

Pass

 

Current Ratio > 1.3

1.19

Fail

Opportunities

Return on Equity > 15%

10.9%

Fail

Valuation

Normalized P/E < 20

40.22

Fail

Dividends

Current Yield > 2%

2.3%

Pass

 

5-Year Dividend Growth > 10%

(15.9%)

Fail

       
 

Total Score

 

4 out of 10

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

With a score of four, Ritchie Bros. Auctioneers isn't getting all the bids shareholders would like to see. The auction company saw its stock jump on hopes of a recovery earlier this year, but the recent market swoon has hit Ritchie hard.

As its name suggests, Ritchie provides auction services. Unlike online bidding services like eBay (Nasdaq: EBAY  ) or live-bidding specialist Sotheby's (NYSE: BID  ) , however, Ritchie auctions off industrial equipment like tractors, trucks, and cranes that farmers and other businesses use. Ritchie is by far the biggest player in its industry, and after a tough time during the credit crisis, the company has seen some of its business return.

In the company's third-quarter results, Ritchie wasn't able to deliver as much as investors wanted to see. Earnings missed estimates by a whopping $0.08 per share, leading to an intraday plunge yesterday that quickly gave way to a recovery for the stock. That earnings miss continues a trend from the previous quarter, but one possible offsetting factor may be that the company apparently had a good October, with CEO Peter Blake saying gross auction proceeds were up more than 55% from year-ago levels.

Paradoxically, one possible reason for the shortfalls may have to do with the success of farmers recently. With crop prices high, companies like Deere (NYSE: DE  ) and Caterpillar (NYSE: CAT  ) have seen their revenues soar through the roof in the past year, as have fertilizer companies Mosaic (NYSE: MOS  ) and PotashCorp (NYSE: POT  ) . When farmers can afford new equipment -- and get financing for it -- then buying cheaper at auction isn't necessarily the best long-term deal.

To reach perfection, Ritchie will have to wait for a return to more normal conditions in the agriculture industry. Once excess profits have worked their way out of the system, Ritchie should see more stable demand for its auction inventory -- and thereby produce the stronger growth it needs.

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 the best investments from the rest.

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

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of eBay, Sotheby's, and Ritchie Bros. Auctioneers. 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 Fool has a disclosure policy.


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