RB Global

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Ritchie Bros. Auctioneers Incorporated (RBA) is a global marketplace for commercial assets, connecting buyers and sellers through live on-site auctions and online marketplaces. They offer a diverse range of equipment and assets, spanning across various industries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview and Analysis

RBA operates a multifaceted business that revolves around providing a platform for the sale of used and new industrial equipment and vehicles. Their core activities include:

1. Auction Services: RBA conducts live on-site auctions at their various facilities around the globe, as well as online auctions through its website. This segment contributes the majority of RBA’s revenues. These auctions bring together buyers and sellers of construction, agricultural, and other industrial equipment.

2. Marketplace Services: This segment operates online marketplaces that allows buyers and sellers to transact directly. They utilize a technology-driven platform to offer a wide range of services including listing assets, providing financing, and processing payments.

Key point here is that while RBA has auction sites all over the world, most of it’s trading volume comes from the U.S.

3. Other Services: This includes ancillary services like inventory solutions, transportation services, repair services, data analytic services, and other related offerings.

Recent Financial Performance RBA’s recent financial results paint a somewhat mixed picture, showcasing both growth and challenges. For the three months ended September 30, 2023:

  • Total revenue increased to $564.1 million from $444 million YoY, a 27% increase. However, this was largely driven by the recent acquisition of IAA, as revenues excluding IAA would have been $419.5 million, which is still a respectable increase of 8% YoY.

  • Service revenue increased by 18% and inventory sales revenue by 38% on an unadjusted basis.

  • Gross profit increased to $493.7 million from 346 million YoY, a 43% increase.
  • However, the net income dropped to ($0.1) million compared to a positive of $66.2 million in 2022.
  • However, Adjusted EBITDA increased to $146.1 from $117.5 million YoY, a 24% increase.
  • Also worth noting is that inventory sold rose to 15.2% of revenue, versus 7.3% in the prior year. Inventory levels also rose significantly.
    • EPS was a negative $0.04, which is less than prior year EPS of $0.49

For the nine months ended September 30, 2023:

  • Total revenue increased to 1643.2 million, a 38% increase.
  • Net income dropped to $86.5 million, from 340.7 million, however adjusted net income increased by $53.3 million to 376.9 million.

A major portion of RBA’s expenses, namely selling, general, and administrative expenses, is very fixed. Therefore, to grow profitably, they will need to increase revenues a lot.

Margins:

*   Gross margins show an impressive jump (43% YoY in Q3 2023), primarily due to the acquisition of IAA.
*   EBITDA margin has shown improvement as well, due to more fixed-expense leverage.

Competitive Landscape

  • RBA faces competition from several sources, including:

    • Traditional Auction Houses: Other auction companies that operate both offline and online auctions.
    • Online Marketplaces: Competitors like eBay, Copart, and IAA who focus more on online marketplaces, rather than the more traditional method of auctioning.
    • Other Auction Formats: These may be companies that have adopted other methods such as timed auctions, or private sales.
    • Local Dealers: In some cases, especially for highly specialized assets, local dealers may compete directly against RBA.
    • Technology: Companies that are developing new ways to buy or sell used equipment, could present a new wave of competition that takes away customers from RBA.

What makes RBA unique? RBA’s main competitive advantage is its vast international network of physical and digital assets. Additionally, their long history, which goes all the way back to 1958, in the auction business, along with their very specialized service offerings that involve asset inspection, financing, etc., sets them apart from competitors. Their service offerings, especially around analytics, also give them a edge over competitors as they provide very important insights to the client.

It is important to know that RBA has become increasingly reliant on acquisitions for growth, recently acquiring IAA, a giant in online car marketplace.

Recent Concerns and Challenges:

  • Merger Integration with IAA: RBA recently acquired IAA, a company involved in online vehicle marketplaces, and are going through a phase of transition where the two businesses are being merged. Integration can be difficult, leading to unexpected costs and a drop in performance, and RBA’s leadership recognizes this.
  • Debt Burden: The company’s debt levels have significantly increased due to acquisitions. It is key to see whether the revenues, and synergies can be extracted effectively to justify the high debt load.
  • Economic Headwinds: In the short-term, the company faces some potential risks that are largely out of its control-such as rising interest rates and a potential recession. These forces could affect consumer spending and borrowing activity, both of which are key components of RBA’s revenues and growth.

Moat Analysis RBA’s moat stems primarily from the following:

  • Established Network: RBA has built a vast network of auction locations and online marketplaces, which is not easily replicated. This network effect is particularly strong in its mature markets. This large network also gives RBA large scale advantages.
  • Brand Recognition: They have built a very recognizable name over a long time that has become very popular among buyers and sellers, especially for certain type of industrial equipment and vehicles. This helps them to attract both buyers and sellers. * Specialized Services: RBA provides many auxiliary services like appraisals, data analytics, and financial assistance. Providing these specialized services reduces dependency on single revenue source and makes the RBA platform more attractive to its customers.

Despite these advantages, RBA’s moat faces several challenges:

  • Replicability: The company has several structural advantages, which can be copied by competitors. This will be particularly pertinent in online marketplaces, which are seeing a rise in competition.
  • Limited Barriers to Entry: In the auction and online marketplace industry there are very few barriers to entry. This makes it easier for smaller players to start offering competing services and taking market share from RBA.

Based on these observations and given the various vulnerabilities that come with the business, and the ease with which competitors can copy RBA, I would rate its moat a 2/5, a narrow moat.

**Risks and Resilience**
  • Industry Cyclicality: The industries served by RBA such as construction and manufacturing are very cyclical. This results in fluctuations in revenues and volatility in stock price during recessions. RBA’s management have focused on having multiple verticals and business streams to lower the impact of industry cyclicality.
  • Technological Disruption: The rise of e-commerce and online marketplaces, and also tech that allows for better supply chain management, has increased the competitive intensity of RBA, and might even make its current model obsolete in the future. They have addressed this in their strategy by increasing investments in technology and also by acquiring companies with online expertise.
  • Execution Risk: There’s a significant degree of execution risk in integrating IAA to RBA, as it’s a huge acquisition. The integration must go smoothly in order to realize the benefits and synergies expected. As of Q3 2023, integration is underway and has so far has not affected profitability.
    • Integration Challenges: Integrating the IAA acquisition is a complex undertaking and any delays or hiccups in this integration might negatively impact business operations and financial results. RBA management has acknowledged that the integration is their top priority.

RBA’s business demonstrates moderate resilience. The company has a diversified base and a strong global brand. It is more susceptible to cyclical changes, however, and does not have a strong moat to protect against a shift in customer preferences or new forms of competition. However, they also have the ability to grow via acquisitions and the data from their previous integrations have been largely positive.

Financial Health RBA’s balance sheet showcases a mix of strengths and vulnerabilities:

  • High Debt: Due to the multiple recent acquisitions, especially the one of IAA, their debt has increased significantly and is at a high level. This could restrict flexibility and increase the cost of capital. RBA has stated that they intend to pay down their debt over the next few years. * Good Cash flow: Despite higher debt levels, they are generating a healthy amount of cash. * Good Intangible assets: Goodwill and intangible assets have increased significantly in recent years. But these are the assets that have been acquired, rather than a reflection of their own ability to generate value, which may lead to lower valuations.

I would thus rate their balance sheet health a 3/5.

Understandability

The business model of RBA is not immediately simple, it requires a bit of effort to understand the different operating segments and various sources of revenues. However, the concepts of auctions, marketplaces and the use of technology is not particularly complex. The complicated part of the business lies in its financial statements, especially due to the recent large acquisitions. I would thus give it a 2/5 on the understandability scale.