Ruane, Cunniff & Goldfarb Investor Day St. Regis Hotel, New York City – May 16, 2014
standpoint, how long are you willing to hold small positions that have not been working, and how often do you reevaluate to see if there is a better opportunity someplace else for the capital?
David Poppe:
I think the answer that you are looking for is we are not very smart. We have owned Ritchie Brothers for about five years. Management built a business model that reminds me a little bit of the Fastenal business model. It is really simple; it is deceptively simple. But it is almost impossible for somebody to replicate.
Ritchie Brothers sells used construction equipment, a lot of CAT machinery in particular, Komatsu machinery through auctions. It is an unreserved auction, which means if you are a seller and you put it in the auction, you cannot take it out. Somebody bids a dollar; you sell that forklift for a dollar. It is really scary for a seller, but it is the only way, really, to run a legitimate auction where the buyers have confidence that they can potentially get a great deal and that the prices are in fact genuine. A lot of the auctions are run so that the sellers can pull their gear out if they do not get a price they like. For the buyer, it is a sucker’s game. If you overpay, you can keep it — but if you get a good deal, you cannot. So Ritchie has a really good model. Again, no one has ever been able to replicate that. Caterpillar is trying with little success, so far. There was another company, IronPlanet that tried to do an online version. Some of you may know IronPlanet filed to do an IPO four years ago and that has never gone anywhere. So I think we got that right. Ritchie Brothers has a very good model.
The part that we missed is that Ritchie Brothers’ heyday was during the US housing boom, and everybody was really busy, and contractors were getting tons of work. They needed to buy machinery, and machinery was very fluid. Ritchie Brothers has a good model. But there are ways competitors can fight back. CAT has fought back really hard, not wanting to lose that used machinery business and the parts and service that sometimes goes with that when you can keep the machinery in your system.
Ritchie Brothers had grown right through the recession in ’01 – ’02, but we were clearly surprised by the magnitude of the housing bust and the collapse of the construction market. I think also we probably missed — as did a lot of other people — that it is a stronger model in Canada, which is a more resources-based economy. So we got
it wrong. It is a cyclical grower. That said, the market respects it. It trades at a high P/E even when it is not doing very well, because it is basically an impossible model for somebody to replicate. It ought to do well if and when the United States construction market ever becomes healthy.
It is small; it is a good quality group of people. I think it was not aggressively enough managed. Maybe management was a little overly self-satisfied coming into this downturn. But we will have a new CEO announced shortly and we will take a long look at that person and see if we want to continue. But the short version is we made a mistake. We certainly did not buy it in ’08 thinking that it would be as modest a performer as it has been. Although I will say in our defense, when your losers are winners, you are still okay.
Question:
Could you comment a little bit on Fastenal? I