Buy Ritchie Bros. Auctions (RBA)

12/03/2009 3:41 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The perfect stock for the current economic uncertainties probably doesn’t exist. These shares would have to shine if the economy recovers in 2010 as strongly as optimists now think and do well if the recovery is only tepid and even climb if the economy slid back toward recession in 2010.

You can certainly understand why I’d want to find such as stock, right?

Probably doesn’t exist, as I said. But that doesn’t stop me from looking. And I’ve found a stock that while not perfect gets me two-thirds of the way to an all-economic-weather buy.

I’d adding shares of Ritchie Bros. Auctioneers (RBA) to Jubak’s Picks with this post.

Why is this close to an all-economic weather stock? Let me explain.

Ritchie Bros. auctions industrial equipment in 25 countries and over the Internet.

You might imagine that the financial crisis and economic slowdown have been good for business. Not quite. The potential supply of equipment to auction has indeed swelled with the tough times, but much of that supply has remained potential. Struggling companies are still in “pay and pray” mode. They’re struggling to make one more payment and praying that things will turn around soon. That’s why in the third quarter gross auction proceeds came to only $693 million, short of the company’s goal of $800 million.

But it’s what happens now—either if the economy grows slowly or as strongly as many hope in 2010—that interests me.

If the economy grows strongly, buyers will come into the market looking for equipment bargains. That will drive up prices, which are now some 40% to 50% off their peak of two years ago. And higher prices will encourage some currently reluctant sellers that this is the time to finally unload equipment that they they’ve held onto.

And Ritchie Bros. gets to ride a virtuous cycle where increased auction sales lead to increased prices which leads to increased auction sales.

If the economy grows, but not very strongly, buyers will come into the market—although in lower numbers—potential sellers will decide the economy isn’t going to bail them out and they’ll finally sell. With a slower economy prices won’t rise, since there will be fewer buyers and more sellers—but they should still manage to hold steady rather than heading south.

It the economy turns back into recession, Ritchie Bros. will pick up some business from companies trying to make capital budgets stretch farther, but sales will slump and supply will probably stagnate. In this scenario, the company’s biggest market, the United States (at 55% of sales), which was the company’s worst market in the third quarter of 2009, would continue to show declining auction sales.

But potential investors should note that the company look like it did manage to grow revenue and earnings from 2008 to 2009, certainly a tough time for the economy.

As I said, the stock isn’t a perfect all-economic-weather stock. Buying Ritchie Bros. is a bet that while growth may be slower than the stock market now anticipates in 2010, the economy isn’t going to slide back into recession next year.

Growth in that slow but not recession scenario should also get a boost from the company’s continued build out of its permanent auction sites (with three new sites currently under construction), continued expansion into non-English-speaking and emerging economies (with first-ever auctions in Turkey scheduled for the fourth to follow on the heels of the company’s first ever auction in India in the third quarter), and the addition of a new multi-lingual auction website.

The Wall Street consensus calls for 12% earnings growth in 2010. I think that’s a reasonable estimate under the slower-than-expected growth in the United States scenario. I think it underestimates the company’s growth prospects in the rest of the world and the backlog in the U.S. economy if growth is as strong as is now hoped in 2010. Under that scenario, I can see Ritchie Bros. showing 20% earnings growth in 2010.

I’m adding the stock to Jubak’s Picks as of December 3 with a target price of $30 a share by November 2010.

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