Going Once, Going Twice…Sold!

03/05/2010 12:24 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

Before the stock market opened yesterday morning (March 4), Ritchie Bros. Auctioneers (NYSE: RBA) reported earnings per share of 20 cents and revenue of $97.1 million. The earnings number matched Wall Street projections, but revenue was 1% above expectations of $95.8 million. Revenue was up 19% for the quarter from the fourth quarter of 2008.

The number to watch, though, if you want to understand what’s going on at Ritchie Bros., is gross auction proceeds. That’s the amount of money that Ritchie Bros. collects for buyers in selling their items. Ritchie Bros. earns a commission on gross auction proceeds.

Gross auction proceeds climbed 1% in the quarter from the fourth quarter of 2008, but fell 2% for all of 2009 from the 2008 level.

The problem was that while the number of items Ritchie sold grew by 12% in 2008, the average price of the equipment the company sold fell.

At the beginning of 2009, the company had expected a surge in the volume of equipment coming to auction as equipment owners, faced with the slowdown in the economy, sold idle equipment. The surge would be big enough, they figured, to more than offset any drop in price.

Well, the company got an increase in volume, but hardly a surge. As best as Ritchie CEO Peter Blake can figure it, interest rates are so low and equipment lenders so willing to work out deals that many companies have decided to hold onto their equipment even though business is slow.

All this makes it very hard to predict Ritchie Bros. revenue and earnings in the rest of 2010. If the economy picks up, auction prices should rise, but the number of companies with currently idle equipment could well lead to fewer buyers at the company’s auctions. And if the economy picks up, it’s hard to see why the companies that have been holding onto their equipment through the slowdown would sell.

The shares have had a decent bounce off a low of $19.49 on February 18—that’s about 10% as of the $21.57 close yesterday—largely because every analyst on Wall Street was busy preparing for the company to deliver below-consensus earnings on March 4.

But I’d rather own a company where the trends in 2010 are more predictable—the larger economy is unpredictable enough, thanks (see this recent post). So today, March 5, I’m selling these shares out of Jubak’s Picks with an 11.5% loss from my initial purchase price of $24.37 on December 3, 2009. This sell will build my cash position in Jubak’s Picks to 11%.

Full disclosure: I don’t own shares of any company mentioned in this post.

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