Rocky Mountain Dealerships Reported Better Than Expected 2Q Results

On Wednesday, after market closed, Rocky Mountain Dealerships posted second quarter EPS of $0.32, which was ahead of consensus and our forecast of $0.25. The beat was mainly as a result of higher gross margin (shift in sales mix) and a lower SGeneral and Administrative expense rate. Reported revenue of $243 million was in-line with our forecast but 3% ahead of second quarter of 2013 mainly due higher new construction equipment sales and parts and service sales in the Agriculture division. Margins were better than our estimate. In second quarter, Company posted an adjusted EBITDA margin of 4.5%, which is ahead of 3.6% realized in second quarter of 2013 and our forecast of 3.7%.

We estimate flat revenue in 2014, but soared margins. In 2014, we estimate revenue to be almost flat with 2013 at more or less $1.1 billion. We believe a fall in used agriculture equipment sales to more than canceled out a healthy recovery in new construction equipment sales and persisted growth in parts and services sales. We estimate adj. EBITDA to grow 21% to $41.1 million mainly as a result of an anticipated recovery in the Construction division. We assume that adj. EBITDA margin improves to 4.1% in 2014 from 3.5% in 2013 as a result of a sales mix shift towards higher-margin product support and enhanced implementation in the Construction division.

Agriculture sales were almost flat. In second quarter, Company realized Agriculture segment sales of $224 million, which was 2% lower than our estimate, but 2% ahead of second quarter of 2013. A year-overyear increase in parts and service sales of 13% canceled out to some extent lower new and used equipment sales. The results represent an enhancement from first quarter, which was impacted by the harsh winter. Margins in the division enhanced to 15.3% from 14.9% in second quarter of 2013 as a result of increased higher-margin parts and service sales, which more than canceled out the influence of lower manufacturer incentives.

Construction division sales of $18.10 million beat our estimate by 13% and soared 20% year over year. The majority of the surge was new equipment sales (increased by 40% year-over-year), which was led by Company’s investment in its management and sales functions, and its ability to source Tier 3 equipment. In second quarter, gross margin soared to 19.10% from 19.1% in second quarter of 2013 given improvements in management and transaction implementation.

We soared our estimate for 2014. We soared our 2014 EBITDA and EPS estimates by 2% mainly to indicate stronger-than-expected second quarter results, canceled out by a lower margin
assumption in third quarter as the firm works to bring down its used equipment inventory. We lowered our revenue and gross profit estimates for the Agriculture division, but this was largely canceled out by higher estimates for the Construction division. We also updated our SGeneral and Administrative expense rate assumption to some extent lower.

We reiterate our 12 months target of $13.00 per share. Our 12 months target persists to be based on the average of 8.1 times our FTM EBITDA forecast (one year forward) less average FTM net debt, and 10.1 times our FTM EPS forecast (one year forward). Our target price implies a total 12 months return of 15% (including dividend yield of 4.3%). We continue to rate Company as Sector Perform as a result of its highly levered balance sheet (we adjust debt to include interest bearing floor plan payables), lower relative operating profit margins, and relatively weaker results over the previous year.

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