(By Balaseshan) CIBC World Markets Inc. analyst Jacob Bout upgraded rating of Rocky Mountain Dealerships Inc. (TSE: RME) to "Sector Outperformer" from "Sector Performer" as margin improvement on the horizon. The brokerage increased price target to $16 from $13.
The brokerage raised its 2013 EBITDA estimate for the construction and agriculture equipment dealer to $51.91 million from $51.08 million, while maintaining its 2014 estimate of $60.91 million.
As RME has 55% to 60% of Case and New Holland agriculture-equipment dealers in Western Canada, Bout believes the cannibalization of parts service to decrease and margins to improve.
Typically, acquired stores have gross margins of 8% to 12% (more recently have been closer to 6%) at the time of acquisition; RME seeks to increase gross margins to 15%-17% over the long term (RME's gross margins have about 15.5% over the last two years despite numerous acquisitions), the analyst noted.
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Bout said the outlook for new equipment sales remains robust, particularly for larger-ticket items such as high-horsepower combines. CNH Global NV (NYSE: CNH) expects the North American market for combines to grow 10% year-over-year in 2012 and its forecast for tractors is about 5% growth.
The analyst has slightly tweaked his 2013 estimates to reflect higher gross margins. He believes organic growth for RME is around 7%-8% per year but expects a higher proportion of part/services sales to increase margins over the next 24 months as he estimates a compound annual growth rate (CAGR) for EBITDA of 18.8%.
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RME is trading up 2.50% at $12.30 on Wednesday.