Rocky Mountain Dealerships (RME) reported better than forecast 4Q 2010 results today.
Raymond James Ltd. continues to rate Rocky’s shares Outperform. It remains bullish on the equipment distribution sector in general and view Rocky Mountain as one of the best (and few remaining) value ideas in the space.
4Q10 revenues and margins both exceeded Raymond James' forecasts, effecting EBIT of $11.6 mln, ahead of its $10.0 mln estimate and last year’s EBIT of $9.7 mln. Top line growth was split about 50/50 between acquired and organic sources. EPS of $0.34 was also above the $0.27 forecast and roughly flat with last year’s EPS. A lower-than-normal tax rate of 25% notably aided the bottom line.
Raymond James views 4Q10 results positively, especially in light of the disappointments reported in the previous three quarters. More importantly, it expects to see increasingly positive results through 2011. Alberta’s construction markets in particular are poised for a dramatic recovery this year, which should benefit Rocky’s higher-margin business accordingly. Similarly, the ag markets are expected to perform better with wheat prices soaring and weather (presumably) normalizing. Hence, Raymond James forecasts a reasonably robust 2011 organic growth rate of ~7%.
Meanwhile, Raymond James's analysts have assumed that acquired revenue growth will decelerate this year, as per management’s explicitly stated goal. This very deliberate decision to turn inwards temporarily and ‘harvest’ the full upside potential of past acquisitions is a critical development, in its view. Rocky has consolidated its market significantly since its IPO in late 2007, yet there is a broadening consensus that this growth has not been very accretive to-date. To the extent that management’s integration efforts over the next few quarters prove otherwise (in the form of stronger margins, higher EPS, and better free cash flow), Raymond James believe there is significant upside potential for the stock.
Raymond James' $14.00 target price equals ~12.0x its revised 2011 forecast. This represents a liquidity-adjusted discount to the current peer group average.
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