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Why Toromont Industries Ltd. Is Down Over 1%

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.

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

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