Since its founding in 1957, Ritchie Bros. Auctioneers (TSX:RBA)(NYSE:RBA) has grown into the global leader in used equipment sales. Over the past 10 years alone, shares have risen 90% compared to a mere 6% return for the TSX overall. And there’s reason to believe that the company’s best days are ahead of it.
Here’s a rundown of Ritchie Bros.’s biggest growth opportunities.
Being the biggest isn’t that big
As mentioned, Ritchie Bros. is the global leader in used equipment sales. Still, the company only moved $4.2 billion in inventory last year, and this is compared to a market size of $360 billion. The U.S. market alone is worth $50 billion, seven times bigger than Canada’s. Not only is there plenty of room left to grow, but Ritchie Bros. is best positioned to consolidate the fragmented market.
The equipment auction business is simple to understand, yet provides massive economies of scale for the biggest players. Most of Richie Bros.’s revenues come from commissions taken by helping customers sell used equipment and machinery. The company pretty much just matches buyers with sellers. As the biggest operator in the world, Ritchie Bros. can typically offer the most liquidity to its customers, meaning faster sales for better prices. This advantage only grows stronger as the company and the industry grow.
Plenty of firepower to take market share
Ritchie Bros. is already the obvious choice for most potential customers in its regions of operation. To grow globally, however, a company needs enough internal and external financing necessary to make acquisitions and roll up the market. Again, Ritchie Bros. is best positioned to do this.
The company’s business generates a very high level of free cash flow that is typically equal to or higher than earnings. In 2011 the firm generated roughly $50 million in free cash flow. This metric has grown nearly every year since, breaking above $250 million this year. With only $55 million in debt, Ritchie Bros. has the firepower necessary to consolidate its massive but fragmented industry. Because advantages accrue to the larger players, the company will only grow stronger with every market-share gain.
Despite the long runway of growth opportunities, shares trade more cheaply than they have in years. The stock trades at 20 times earnings compared to a five-year average of 30 times. It also trades at only 8.6 times cash flow, roughly 50% lower than its five-year average.
The company has also committed to returning 55-60% of free cash flow to shareholders as a dividend. This year Ritchie Bros. raised its dividend by 14%, upping the yield to a current 2.7%. While this is nothing to write home about, it has plenty of room to grow while being very sustainable. Shares of Ritchie Bros. looks like a compelling investment for patient investors willing to ride out the long-term tailwinds buoying the business.
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Fool contributor Ryan Vanzo has no position in any stocks mentioned.