Friday, October 18, 2013

Rocky Mountain: Way Too Cheap

Shares of Rocky Mountain Dealerships (RME) have fallen dramatically over the last few months, for issues that appear to be only short term in nature. As a result, the company can be purchased for not much more than its 2007 IPO price.

But since that IPO six years ago, both sales and operating income have tripled. Consequently, the company now trades at a P/E of less than 10 despite a history of stellar returns on capital, including an ROE* of 19% for 2012.Read more...


Anonymous said...

Long time follower of your site. However I think you are being a bit misleading by not only excluding $380 million (>7x EBITDA) worth of operating debt in the enterprise value calculation, but referring to it as a 'payable' related to inventory. Yes it is in fact there to support inventory, but it is secured debt nonetheless, and not meaningless when viewed in relation to the earnings of the business.

Always a challenge trying to figure out how to deal with valuation in a business with huge working capital and thus large operating debt balances outstanding.


Anonymous said...


Anonymous said...

Hi Saj,

I've been doing some research on RME and wanted to run a question by you. Do you know what exactly the market didn't like after Q2 results? The only thing I can find was the construction sales. They are loosing mkt share there. Other than that, I think sales were decent given the flooding over there in q2. I think the company is doing well.



Saj Karsan said...

Hi RK,

I can certainly understand that point of view. It's a complicated issue.

Hi Anon,

I suspect it's this line from the MD&A: "To date, we have noted that this increased pricing has adversely affected
pre-sale activity and as a result, we expect to deliver fewer new agriculture equipment units during the fourth quarter of 2013."

Anonymous said...

19% ROE but that is in large part due to leverage... and buying at 1.6x BV. Also it is a highly cyclical business and this is certainly not the bottom.

Anonymous said...

Hi Saj,

I'm circling back to some ideas that caught my attention and your Rocky Mountain idea seemed like a good one when I first read it. Did you ever take a position?

I wonder if you could post an update if you have one?



Saj Karsan said...

Hi Vern,

I did, as per the disclosure in the article.

Not much has changed for me since the original article, so I have nothing to really offer in an update.