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Monday, May 11, 2009

Tale of Two Auction Franchises

Two auctioneers, both established franchises protected by meaningful barriers to entry:
  • One is a household name and operates as a duopoly.
  • The other is only known by customers in its niche market and by focused investors.
  • One serves the luxury market.
  • The other serves the industrial equipment market.
  • One reported March quarter revenue down 58% Y/Y to $54 million and an operating loss of $50 million (excluding $6 million of restructuring costs, compared to an operating loss of $18 million).
  • The other reported revenue up 3% Y/Y to $84 million and operating income of $28 million (+19% Y/Y) for the quarter.
  • One has net debt position of $474 million and generated trailing twelve month cash flow from operations of negative $180 million and negative free cash flow of $202 million.
  • The other has a net cash position of $129 million and generated trailing twelve month cash flow from operations of $128 million and negative free cash flow of $26 million (as a result of planned expansion capital expenditures).
Who are these auctioneers? The first one isn't so difficult to guess -- Sotheby's (BID, $11.98) -- while the second is below-the-radar Ritchie Bros. Auctioneers (RBA, $23.92). Both companies reported results in recent weeks which, not surprisingly, revealed divergent paths:
  • Luxury sales are down significantly and Sotheby's is reducing costs as fast as possible in an effort to conserve cash and, hopefully, service/repay debt. Sotheby's commented that the large revenue decrease was "primarily due to a 71% decline in net auction sales attributable to the downturn in the global economy and its impact on the international art market that began in September 2008." Results can be found here.
  • Used industrial equipment sales are holding their own and Ritchie Bros. is not only seeing record auction results but still growing, albeit slightly. Ritchie noted that "The Company conducted 32 industrial auctions in nine countries throughout North America, Europe, the Middle East and Australia during the first quarter of 2009, and set three regional gross auction proceeds records." Results can be found here.
Although Sotheby's was founded in 1744 and will, no doubt, be around in 2044 (and 2144), we're nervous about the company's trends and weakening financial position (debt load) amidst what could be a prolonged luxury market slowdown. We're not chartists, yet a management "investor briefing" from April 2008 (link here) shows that total auction sales trended lower for four years following the 1999 peak. Lack of forward visibility combined with the company's the debt burden call for caution, in our view.

Ritchie Bros. Auctioneers was founded in 1963 and, at 12/31/08, operated from approximately 110 locations worldwide. Customers "include end-users of equipment, finance companies and banks, truck and equipment dealers, equipment rental companies, and manufacturers." We really like this high margin and high ROE business, which we see as more consistent than that of Sotheby's. We think Ritchie Bros. will also be around in 2044. However, after recovering from recent lows, the stock isn't cheap at 24 times trailing and forward EPS. We plan to keep watching RBA.

Happy investing,

Jeffrey Walkenhorst

Disclosure: none.

© 2009 Jeffrey Walkenhorst
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1 comment:

  1. I am somehow very much a fanatic of these investors putting up their money for business like industrial equipments. Maybe this is their field and they believe that selling used bucket trucks will help their investment worthy.


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