Ritchie Bros. Drops as Competition Bites: Vancouver Mover
Ritchie Bros. Auctioneers Inc. (RBA), the world’s largest auctioneer of industrial equipment, dropped to its lowest in six years as more competition for resale equipment brought second-quarter profit below estimates.
The stock plunged as much as 13 percent to C$17.88, the lowest since February 2006, in Toronto today. It was the biggest intra-day drop in a year. The stock fell 6.5 percent at C$19.20 at 12:28 p.m. and has lost 14 percent this year.
The company, based in Burnaby, British Columbia, reported adjusted earnings for the second quarter of 30 cents a share compared with 25 cents a year ago. The median estimate of 16 analysts surveyed by Bloomberg was for 36 cents a share. Profit was C$31.3 million this quarter compared with C$26.8 million the year before.
“People were expecting greater volume in Ritchie’s system and that didn’t happen,” said Hamzah Mazari, an analyst with Credit Suisse by telephone from New York. “Historically, Ritchie, in an economic recovery or a slow recovery, should be able to do close to double-digit gross auction proceeds growth, which they didn’t do this quarter.” Mazari has a neutral rating on the stock.
Increased competition in the sale of used equipment cut into the company’s profits, forcing it to offer people looking to sell their equipment price guarantees. On a conference call with analysts, Chief Executive Officer Peter Blake said these guarantees hurt margins when prices came down in the second half of the quarter.
“In general, we did see some softening for some equipment in the latter half of the quarter, particularly older model equipment,” he said in a conference call.
Ritchie had to guarantee 36 percent of its sales this quarter as equipment sellers looked elsewhere to find buyers, Stephen Volkmann, an analyst with Jefferies & Co. Inc., wrote in a note to clients.
“They are competing for used equipment with dealers who want to sell it, with brokers who want to sell it, with Craigslist and people selling things directly,” Volkmann said by phone from New York. “So they have to be a little bit more aggressive in going out and bidding for these lots of equipment.”
I came across this story and find it very intriguing on many fronts. Ritchie Bros.Auctions was a rags to riches story….in the 1960’sthe family owned a furniture shop in B.C. Interior . One day they decided they had to clear out some merchandise and that an auction would be the best way….it was so successful they went into auctioneering and never looked back.
The auction business is a good bell weather of the economy. Also many have said auctioneering is recession proof. When the economy goes down, many are anxious to sell to wind down inventory and achieve cash flow. The auctioneer organizes the auction,does all the paperwork, sells to the highest bidder and collects a PERCENTAGE of the sale. ie If an item sells a item at auction for $100, their is often a BUYERS and a SELLERS Premium (as well as applicable sales tax. The Seller would pay approx. 15% of the $100 and the Buyer often pays 15%. on top of the $100.
Thus the Auctioneer would acquire $30 Total from the $100 sale, The Buyer would pay $115 PLUS the applicable sales tax on $100 ie another 12%. That is why a Buyer should keep in mind whatever they bid, they should add approx 30% as the final total so as not to get carried away.
In auctions, There is the RESERVE BID and the NON RESERVE Reserve bid. A Reserve bid is a minimum price that has been established by the buyer or the item is pulled from the auction. NON RESERVE = it is sold for whatever the highest bid is.
However, it appears that Ritchie Brothers is not immune, as all the old rules are changing. For them to offer a guaranteed price is a sign of desperation…the auction business can be very unpredictable. Clearly they are gambling and trying to hold onto clients.
In addition, in BC, the Bureaucrats have added another tax to heavy off-road equipment, whereby old equipment is taxed more than newer via the emissions. This would tend to make buyers shy away from these older units.
What I see evolving is a “dog – eat – dog” world, as the news item suggest, people will get rid of the middleman and try to sell directly. In addition, as the Global economy stagnates, the supply of items may overwhelm the buyers and it becomes a race to the bottom. If for example someone has a piece of equipment worth say $100,000, the auctioneers cut could be $30,000. If a buyer and seller hook up…and agree to a price of say $85,000, they are both further ahead than at auction.
In other words, in sheer irony…The old economic system that built Ritchie Brothers to a world powerhouse has done a 180 degree turn and may take it down. The bigger they are the harder they fall.