Please ensure Javascript is enabled for purposes of website accessibility

Buy Ritchie Bros. Stock After a 14% Drop? What You Need to Know

By Rich Smith - Aug 15, 2016 at 12:17PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Last quarter's news was bad, but does one bad quarter a bad stock make?

Owners of Ritchie Bros. Auctioneers (RBA -0.86%) stock are having a bad month.

Last week, the world's largest auctioneer of used industrial equipment reported Q2 2016 revenues of $159 million, which was short of analysts' $161 million consensus. Profits missed the forecast $0.44 by $0.07, coming in at just $0.37 -- and Ritchie Bros. stock has fallen 14% since then.

But could it be time for a turnaround?

According to one analyst, Cleveland-based KeyBanc Capital Markets, that is exactly what we're looking at in Ritchie Bros. Auctioneers today -- an opportunity to buy the world's preeminent industrial auctioneer at a discount, and ahead of news of a turnaround. But is KeyBanc right about that?

Here are three things you need to know.

Ritchie Bros. stock fell hard last week, but KeyBanc thinks investors can ride it right back up. Image source: Getty Images.

1. A chance at a 21% profit

Up until today, KeyBanc had maintained only a "sector weight" rating on Ritchie Bros. stock, which had been trading near its 52-week high. But with the stock now 14% cheaper than it cost just seven days ago, KeyBanc thinks the pullback offers investors an opportunity to profit.

Upgrading the shares to overweight, KeyBanc assigned Ritchie Bros. Auctioneers stock a $34 price target. That's not even as expensive as the stock's highest price in the past year -- but if it gets there, it could lift the stock 21% higher from today's price.

2. This, too, shall pass

Sales and earnings were both below forecast in Q2. But quoted on this morning, KeyBanc says the problems that Ritchie Bros. encountered last quarter are "transitory." Specifically, Ritchie Bros. CEO Ravi Saligram highlighted "a sudden decline in equipment pricing globally in June -- across various sectors -- that was driven by an imbalance between demand and supply, increasing competitive pressures."

Looking just a little ways into the future, KeyBanc spies "potential non-res construction cyclical weakness that seems imminent." If it's right about that, then investors could soon see even more equipment going on market, which would mean more business for Ritchie Bros.

3. And really, things aren't that bad already

That sounds like good news for Ritchie Bros. But honestly, while investors were disappointed by the twin sales and earnings misses last week, Ritchie Bros' business didn't do half bad in Q2. Sales, while light from analysts' perspective, were still up 2% year over year. And the company reported "record" gross auction proceeds for both Q2 and for the first half of the year, with $1.3 billion and $2.3 billion in equipment value, respectively, going under the hammer so far.

Given all this, KeyBanc feels that investors overreacted to the bad news, and argues that "the recent pullback [has created] an opportunistic entry point" to buy Ritchie Bros. stock, and calls the stock's valuation "attractive."

But is it, really?

The most important thing: Valuation

I must admit that I have my doubts. Valued on trailing earnings, Ritchie Bros. stock currently costs 21.9 times earnings, which, objectively speaking, doesn't look cheap on the surface. The stock pays a 2.2% dividend yield, and according to data from S&P Global Market Intelligence, most analysts believe Ritchie Bros. is capable of growing earnings at only about 11% annually over the next five years.

That all adds up to a total expected return on the stock (earnings growth, plus dividend yield) of 13.2%, for a stock trading at 21.9 times earnings -- a total return ratio of about 1.66, versus the sub-1.0 ratio value investors ordinarily seek.

And believe it or not, the story gets worse. Over the past 12 months, Ritchie Bros. generated only $101 million in positive cash from operations, which is far less than the $136 million in GAAP net income it reported. Once you subtract out capital expenditures, free cash flow at the company drops to an anemic $78 million, or barely $0.57 in real cash profit for every $1 in reported profits."\

Long story short, with a poor total return ratio, and a price-to-free-cash-flow ratio that I now estimate at north of 38 (again, on a growth rate of just 11%), Ritchie Bros. Auctioneer stock still looks dreadfully overpriced to me. Even after its 14% drop, I wouldn't touch it with a 100-foot crane.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Ritchie Bros. Auctioneers Incorporated Stock Quote
Ritchie Bros. Auctioneers Incorporated
$60.02 (-0.86%) $0.52

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/22/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.