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.