Ritchie Bros Feels The Hammer

By Stephen D. Simpson, CFA | July 15, 2010 AAA

When I worked for an equity hedge fund, we had a simple saying around the office - "When in doubt, sell it out". In other words, we often felt that if we had any real uncertainty about a company's prospects, it just did not pay to hold on and hope for the best. After all, the cost of selling a stock ahead of potential bad news and buying it back later if we were wrong was often just pennies a share; far less than holding it through bad news.

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Perhaps that is what holders of Ritchie Bros. Auctioneers (NYSE:RBA) were thinking yesterday. The stock dropped sharply on high volume after the company announced a mid-quarter update call after the close on Thursday. While some companies make a habit of mid-quarter updates, Ritchie Bros. is not one of them. What's more, mid-quarter updates are often much like getting a call from your lawyer saying "we need to talk" - it is almost never good news.

Things have been rough of late for this leading auctioneer of used industrial equipment. The company missed estimates in its last quarter by a significant margin, and top-line performance (that is, revenue growth) was not impressive. Worse still, the company has been positioning itself for a recovery in the business by hiring more employees. Although that makes a great deal of sense for the long term, the short-term impact is higher expenses and very little incremental revenue to offset them.

Making a tough situation even harder, there are factors preying on this stock that the company cannot control. Rival IronPlanet has filed to go public and its filings with the SEC indicate that this company has been growing considerably faster than Ritchie Bros. So although Ritchie Bros. is several times larger, the question is now out there as to whether it is losing share and whether IronPlanet's online-only model is the wave of the future. (For more, see IPO Basics: What Is An IPO?)

On top of that, there is the economy itself to worry about. Right now, it feels as though we are in a reverse-Goldilocks situation - the porridge is just precisely not-right. There are enough signs of life that companies do not want to dispose of equipment and get caught short, and those who would like to buy are worried about over stretching themselves and are having a difficult time getting banks to extend loans for expansion.

A Dearth of Peers
Unfortunately, there are not enough companies in the public market to really round out visibility. Sotheby's (NYSE:BID) sells art, not backhoes, and eBay (Nasdaq:EBAY) is far more consumer-oriented. Consequently, the sometimes-good, sometimes-bad reports we have been seeing about Sotheby sales (like the record-breaking Turner sale and the commission to sell Lehman's art) mean nothing here.

Nevertheless, there may be encouraging signs of life if you dig deeper. Caterpillar (NYSE:CAT) executives have said they see prices for some types of used equipment going up, and other private resellers seem to be corroborating this.

The Bottom Line
I see no reason why a potentially weak second quarter should permanently chase off Ritchie Bros. bulls. Management has chosen to respond to near-term difficulties by investing in future growth infrastructure and that is one of the hallmarks of long-term winners. Consequently, I do think the company will be well-positioned to profit off of the eventual recovery in the U.S. economy. (For more, see The Characteristics Of A Successful Company.)

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