Ritchie Bros. Auctioneers' (RBA -1.29%) stock price swing hasn't thrilled investors this year. In fact, 2017 has been a night and day difference from a 2016 that witnessed Ritchie Bros' stock move significantly higher throughout the year.
Even more investors bailed out of the stock after the company released its disappointing third-quarter results. But are the driving factors behind its poor third-quarter results a speed bump, or a long-term problem?
By the numbers
Starting at the top, Ritchie Bros. revenue checked in at $141 million during the third quarter, a healthy 9% increase over the prior year and above analysts' estimates calling for $139.4 billion. However, much of that improvement was driven by acquisitions rather than organic growth. In fact, on a like-for-like basis, which excludes any acquisitions, Ritchie's revenue was actually down 8.3% compared to the prior year. It was mostly driven lower due to significant equipment supply shortage in the U.S. as dealers and consumers continue to have a high utilization rate.
Image source: Ritchie Bros. Auctioneers.
Ritchie Bros. CEO Ravi Saligram had this to say in a press release:
"We faced a tough comparable quarter due to the massive Columbus auction last year as well as growing pains of sales force integration and execution, as our legacy RB and IP teams learn to sell each others' offerings. On a positive note, the combination of RB and IP continued to deliver sequential revenue rate improvement. We achieved strong double-digit growth in our International business, particularly Europe , and in RBFS, Mascus and ancillary services. We remain optimistic about the long-term value creation prospects of the combination with IronPlanet and are laser-focused on regaining growth momentum."
One big concern
Equipment supply and tough comparisons are issues that tend to be cyclical or short term in nature, but that doesn't mean Ritchie's third quarter was without a major concern. Adjusted-EBITDA margin declined a staggering 940 basis points down to 22.6% during the third quarter. That's a significant and concerning decline in margins if it's a long-term issue, but signs point to it being more of an acquisition speed bump.
Combining operations isn't simple and while IronPlanet will be a great asset to Ritchie's long-term growth, costs are mounting in the short term. Management noted that salesforce integration was particularly weighing on results. It's easy to throw out impressive synergy figures that companies expect to save annually after acquiring companies, but a look at the graphic below helps remind investors this is rarely a simple or quick process.
Image source: RBA's third-quarter Nov. 10, 2017 earnings presentation.
Investors have to remember that while IronPlanet's integration is hurting margins now, it will increase Ritchie's ability to generate revenue from online options and close down low return live-auction sites, which could boost margins to a level higher than pre-acquisition. But the ultimate takeaway for investors is that Iron Planet growing pains, strong 2016 comparisons, and a current weak market for used equipment -- due to high equipment utilization rates -- should all be short term in nature.
