Why Toromont Industries Ltd. Is Down Over 1%

Toromont Industries Ltd. (TSX:TIH) is down over 1% following the release of its Q3 earnings results. Should you buy on the dip? Let’s find out.

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Toromont Industries Ltd. (TSX:TIH), one of Canada’s largest Caterpillar dealers and one of North America’s leading providers of industrial and recreational refrigeration systems, released its third-quarter earnings results after the market closed Monday, and its stock responded by falling over 1% in early trading yesterday. Let’s break down the quarterly results and the fundamentals of its stock to determine if we should consider using this weakness as a long-term buying opportunity.

Breaking down the Q3 results

Here’s a quick breakdown of 12 of the most notable financial statistics from Toromont’s three-month period ended September 30, 2017, compared with the same period in 2016:

Metric Q3 2017 Q3 2016 Change
Equipment Group revenues $488.02 million $421.86 million 15.7%
CIMCO revenues $96.14 million $87.91 million 9.4%
Total revenue $584.16 million $509.77 million 14.6%
Gross profit $141.29 million $126.23 million 11.9%
Operating income $68.59 million $66.04 million 3.9%
Operating margin 11.7% 13.0% (130 basis points)
Net earnings $49.36 million $47.64 million 3.6%
Basic earnings per share (EPS) $0.63 $0.61 3.3%
Equipment Group bookings $185 million $181 million 2.2%
Equipment Group backlogs $197 million $121 million 62.8%
CIMCO bookings $72 million $24 million 200%
CIMCO backlogs $176 million $102 million 72.5%

Hewitt acquisition update

In the press release, Toromont noted that its acquisition of Hewitt was completed on October 27. The $1.07 billion acquisition was completed using a cash consideration of $945.6 million and the issuance of approximately 2.25 million shares of stock for $126.3 million, and it stated that this acquisition “provides a significant opportunity for profitable growth and the continued delivery of consistent returns” to its stakeholders.

What should you do now?

It was a great quarter overall for Toromont, especially when you consider that its net earnings were up about 23% when excluding costs related to its acquisition of Hewitt; however, I think this fact may have been overlooked, which could be why the stock is taking a slight hit. Regardless, I think Toromont represents a fantastic long-term investment opportunity for two fundamental reasons.

First, it’s undervalued based on its growth. Toromont’s stock trades at 26.6 times fiscal 2017’s estimated EPS of $2.13 and 20.6 times fiscal 2018’s estimated EPS of $2.75, both of which are inexpensive given its current adjusted earnings-growth rate, its estimated 29.1% earnings-growth rate in 2018, and its long-term growth potential. 

Second, it’s a dividend-growth aristocrat. Toromont pays a quarterly dividend of $0.19 per share, equating to $0.76 per share on an annualized basis, which gives it a yield of about 1.3%. A 1.3% yield is far from high, but it’s very important to note that the company has raised its annual dividend payment for an incredible 27 straight years, and its 5.6% hike in February has it on track for 2017 to mark the 28th consecutive year with an increase.

With all of the information provided above in mind, I think Foolish investors should strongly consider using the post-earnings weakness in Toromont’s stock to begin scaling in to long-term positions.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in any stocks mentioned.

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