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Why Toromont Industries Ltd. Soared 11.07% on Monday

What happened?

Shares of diversified industrial company Toromont Industries Ltd. (TSX:TIH) soared 11.07% on Monday following the announcement of its deal to acquire the businesses and operating assets of the privately held Hewitt Group for about $1.02 billion in cash and stock.

So what?

Hewitt is the authorized dealer of Caterpillar equipment in Quebec, western Labrador, and the Maritimes; it’s the Caterpillar lift truck dealer for most of Ontario, and the MaK dealer for Quebec, the Maritimes, and the eastern seaboard of the United States; it currently has 45 branches and about 2,000 employees.

Hewitt reported revenues of over $1.0 billion and net earnings of $46.6 million in its fiscal year ended on December 28, 2016, so Toromont is paying about one times last year’s sales and about 21.5 times last year’s net earnings for the company, which I think is a very good deal, and the market seems to agree.

Now what?

This is the largest acquisition in Toromont’s 56-year history, and it’s expected to close in mid-October, be accretive to its net earnings in 2018, and provide “strong potential for future organic growth opportunities.”

I think this acquisition makes a lot of sense, because Hewitt’s operating assets will fit right in with Toromont’s Equipment Group division, which is already one of the world’s largest Caterpillar dealerships by revenue and geographic territory, and it adds to Toromont’s industry-leading rental operations and its growing agricultural equipment businesses.

Upon close of the acquisition, Toromont’s Caterpillar dealership will operate 120 branches across Nunavut, Manitoba, Ontario, Quebec, New Brunswick, Prince Edward Island, Nova Scotia, and Newfoundland & Labrodor, which will give it one of the largest sales territories in the Caterpillar dealer network.

Toromont’s stock is up more than 4% since I last recommended it on July 11, and I think this deal makes it an even more attractive long-term opportunity today. With all of this being said, I think Foolish investors should consider initiating long-term positions in Toromont today with the intention of adding to those positions on any significant pullback in the future.

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Fool contributor has no position in any of the stocks mentioned.

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