Rocky Mountain Dealerships: Opportunity In Farming

Rocky Mountain Dealerships (TSE: RME) is a small-cap Canadian company operating in Western Canada within the used agricultural equipment market. The company is trading below 2009 levels and has been in a depressed state given the collapse of energy hurting agricultural spending across Western Canada. However, I believe there is an interesting opportunity in this name considering the long-term fundamentals. By any measure, the company is very cheap: 0.7 price to book ratio, 0.1 price to sales ratio, 3.3 price to free cash flow and forward price to earnings at 7.7. On other valuation metrics, the company seems even more undervalued: the company has a projected FCF-based value of $8.65, enterprise value of $147M (vs. $122 market cap) and pays over 7% yield despite only having a 78% payout ratio.

What is interesting about this company is that they are growing in many key segments despite seeing slight declines in their overall business. Total revenues increased 1.0% last year with used equipment sales up 24% to $377 million despite weaker overall demand and earnings and gross margin declines. Although the market has slightly rebounded, the company is allocating capital in a difficult agricultural environment by building new facilities, making acquisitions (Chabot Implements enhanced their sales footprint in Manitoba) and investing in new markets such as geomatics and agrimatics technologies which aim to make farmers more productive and efficient (through their acquisition of NGF Geomatics)

Will Rocky Mountain Dealerships turn the corner?

Although the company has been through a rough patch and is making the right moves, a lot more work needs to be done in order to enhance performance. Although the company has a decent return on invested capital (~11%), the company needs to enhance its gross and operating margins in order to increase cash flows while continuing to diversify its portfolio in new innovations within the agricultural space. This certainly requires a (very) long-term mindset but management will have to execute, be creative and contrarian while navigating a cyclical environment. The company has very little debt (debt to assets is 0.08), and with retained earnings growing every quarter, the company should be in a position to outperform over the long-term. 

DISCLOSURE: Logos LP is long RME