I am doing my first review of a company suggested to me by a follower of my blog. The company is Rocky Mountain Dealerships (TSE:RME). Rocky Mountains owns stores selling farming equipment in the Canadian Prairies. They aim to grow through consolidating small family owned dealerships and gain economies of scale. Evaluating this business through my primary investment criteria, the company has made adjusted earnings $1.16 per share in 2017 and given it’s current price of 11.75 trades at a P/E ratio of 10.12. This is just over the edge of my 10 times rule and so neither passes or fails based on this alone. Now let’s look to see if there is any other info which would increase or decrease the value of this company.
The next thing I like to look at is how the adjusted earnings have behaved over time. Well they earned $1.16 in 2017, $0.83 in 2016 and $0.71 in 2015. I used adjusted earnings as it removes some temporary factors like interest rate derivatives which while they change in value year to year they should net out to zero in the long run. To me this shows that their earnings in 2017 may be an anomaly and may not be repeated. Farming is a commodity business and so is subject to booms and busts. We want to make sure that the results from 2017 are repeatable and not a one time success. In their latest investor presentation they mention that the growth of earnings is due to cost savings by closing unnecessary stores and still maintaining market share. In their financial statements their revenue seems fairly flat so this is likely true. Cost savings should be maintainable into the future more than a temporary spike in sales and so the earnings from 2017 may be a good indication of future earnings.
Rocky Mountain has an insider ownership of 22% showing that the management is committed financially to the company and they are not just there for a pay check and stock options. The stock also offers a $0.46 annual dividend. Any established business like Rocky Mountain should pay their shareholders to compensate them and to avoid too much cash piling up in the company which could be wasted by adventurous management.
In conclusion I think Rocky Mountain Dealerships is a solid company with sustainable earnings in a mature industry that will pay dividends for many years to come. I would wait for a pull back in the price to $11.50 before buying though just to be sure you get it at a bargain.
Disclosure: I don’t own shares in TSE:RME or plan to buy shares in the next few days.
Cold and Rich 
Thanks, Chris. I would add that RME has recently announced a growth plan for the next 5 years. Their primary focus is to acquire new locations in Saskatchewan and the US. I like the opportunity to acquire and improve these businesses and leverage their expertise and infrastructure to improve EBITDA. In fact RME announced an acquisition in Saskatchewan of John Bob Farm Equipment at the beginning of July.
LikeLike
Growth plans are nice, but I like to have a healthy skepticism of them as I have seen them go bad almost as often as they go good. That is why I tend to focus on what the company has already achieved and then just hope that any growth is a cherry on top.
LikeLike