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Small & Large Cap Auction Firms Continue To See Growth In All Economic Conditions
By: AllPennyStocks.com News
January 5, 2012
Many small cap investors are always hunting developing companies that claim to possess technology that could change the current landscape for their given area of expertise. This includes investing in companies such as early-stage biotechnology firms whose compound or technology has demonstrated pre-clinical research that outstrips current competition or an electric car maker who’s green, emission-free vehicle can run longer and faster than anything else in production today, even if the company still is years away from commercial production. The bottom line is that many investors carry something in their portfolio that can reap enormous rewards due to low valuations and strong, albeit often-times risky, possibilities.
What many – if not most – fail to recognize is the countless small caps that are not purely developmental; companies that have established a brand over years and generate revenue on a regular basis. Because of their core competencies and established market presence, these companies inherently hedge some risks in small cap investing while still carrying a substantial upside.
They may not sit in some of the flashiest of industries, but valuations are not based on whether a company sells a time machine or a gumball machine. In fact, there is a lot to be said for companies that are focused on sectors that are time-tested and true to give stability to future growth.
The auction industry is a prime example of an age-old industry that continues to thrive in the twenty-first century. The classic type of a live, on-site auction is still seeing strong demand and online auctions continue to grow at a rate that has been outpacing most all retail sectors for more than a decade as the internet becomes more commonplace. The exceptional popularity of online shows and advertising has consumers very comfortable with the auction industry, particularly in today’s challenging economic climate. Even when the financial industry began to collapse in 2008, $268.5 billion in goods and services were sold at live auctions in the U.S., representing an increase of 5.3 percent over 2007.
The housing market crash has provided countless opportunities for auctioneers in the past four years. Thousands of auctions are ongoing daily as lenders struggle to rebalance their books from millions of loans gone south and ending in foreclosure. A recent report from the Centre for Responsible Lending said that at least 2.7 million mortgages issued between 2004 and 2008 ended in foreclosure with an additional four million expected to be in foreclosure in the next two years. An article by the Business News Network (BNN) provides clear evidence of the importance of auctions in helping to solve the U.S. housing hangover, the article can be read here: http://www.bnn.ca/News/2011/12/30/US-auctions-help-reduce-backlog-of-foreclosures.aspx.
There are some majors in the industry that dominate the markets, such as Ritchie Bros Auctioneers, Inc. (NYSE:RBA) (TSX:RBA), the world’s largest industrial auctioneer. Over the last decade, shares of RBA have risen from $3.50 to over $31 early in 2011. RBA closed 2011 with record sales as it reported on December 21, 2011 that it sold approximately $3.7 billion of equipment at 339 unreserved auctions around the world in 2011. This represented a 12 percent increase in gross auction proceeds over 2010 and the highest gross auction proceeds in Ritchie Brothers’ history.
Liquidity Services Inc. (Nasdaq:LQDT) has seen shares surge from $4.55 in early 2009 to over $39 each in 2011. In 2011 alone, shares of LQDT rose by nearly 160 percent and closed near highs for the year. Big money is seeing the value in auctioneers such as Liquidity Services as mutual fund ownership of LQDT has risen from 108 to 278 funds in the past two years. For the fourth straight year, Forbes named Liquidity Services to its list of the 100 Best Small Companies in America.
Operating with a unique business model, Liquidity Services has virtually eliminated any competition. The online auctioneer specifically targets the wholesale sector and receives business from government agencies as well as the wholesale business sector. As such, other online auction houses such as Ebay or Amazon.com pose no threat to Liquidity’s revenue because they are more consumer-related.
There are few companies in the small cap markets that offer a substantial value proposition in the auction industry that can rise to the heights of their larger counterparts. But…they do exist.
For more than half a century, Hodgins Auctioneers (TSX-Venture:HA) has been establishing itself as an industry leader in the auction business. A full-service auction company, Hodgins operates as an auctioneer of agricultural and industrial equipment, automobiles, and real estate, amongst other things. Moreover, Hodgins has the capabilities to provide a financial guarantee for a package of assets when appropriate, something very few companies offer. It offers a range of services including live auctions with online bidding, set up or make-ready services, marketing programs, appraisals and mobile office and support services.
The company has remained relatively “under the radar,” keeping business primarily local to its Western Canada headquarters, but in recent years is expanding its footprint into Eastern Canada and the United States. Presently conducting approximately 100 auctions per year, both live and online, system sales are holding a steady course of approximately $40 to $50 million with gross revenue between $3.5 and $4.2 million annually.
A recent independent analyst report was issued by Syed Kumail Abbas Rizvi, CFA, FRM which defines the potential of Hodgins while placing a “Strong Buy” rating with a price target of $0.36 for this stock currently trading around a dime with a market cap of only roughly $1 million. Rizvi uses very conservative growth estimates in his analysis in determining the price target. In fact, the estimates used were well below the current year-over-year growth that Hodgins recently produced in regulatory filings.
In his analysis, Rizvi notes several key components to the value proposition of Hodgins. Some of these included revenue growth in Q3 2011, in which Hodgins reported revenues of $0.84 million versus $0.42 million in Q3 2010; commission revenues which grew by around 26% in Q3 of 2011; cutting of general and administrative costs while increasing revenues; and a large insider holdings percentage.
He also remarks about the sound balance sheet of Hodgins in stating, “Hodgins has restructured its long term commitments and has repaid its operating lines of credit. This will strengthen the company’s balance sheet and will also have an impact on its margin due to lower interest costs.”
Investors are encouraged to read the complete analyst report at http://www.allpennystocks.com/images/V.HA_research_report_Jan_2012.pdf.
As the North American economies continue to recover, industries such as the auction business continue to flourish by filling cash needs for property owners. It may not be exactly recession-proof, but it yields a substantial opportunity that slips past many investors as companies such as Ritchie Brothers, Liquidity Services and Hodgins appear poised to continue to experience strong growth and profit margins in the years to come.
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