Toromont Industries (TSX:TIH) released its earnings on Tuesday. The results were:
- $1.2 billion in revenue, up 6.6%.
- $390 million in gross profit, up 1.5%.
- $204.6 million in operating income, down 3.8%.
- $154 million in net income, down 3.8%.
For the full year, the results were:
- $4.6 billion in revenue, up 11.3%.
- $1.2 in gross profit, up 4.7%.
- $704 million in operating income, up 13.7%.
- $534 million in net income, up 17%.
In this article I will explore Toromont’s fourth-quarter earnings in detail, so you can decide whether the stock is a good fit for your portfolio.
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What Toromont does
Before getting into the “meat” of Toromont’s fourth-quarter earnings, we should take a look at what the company does. It’s all well and good when a company delivers strong earnings, but we need to know the company’s competitive position before we can truly conclude that it will keep making money.
Toromont is Canada’s biggest Caterpillar (NYSE:CAT) dealer. CAT is a U.S.-based heavy equipment manufacturer. It sells products like:
- Dump trucks.
- Tractors.
- Backhoes.
- Hydraulic mining shovels.
- Engines.
It’s quite a laundry list of heavy equipment supplies. And, the company does not have very many competitors in its industry. It’s for this reason that Caterpillar stock is a fan favourite with billionaire investors, such as the Gates family’s Cascade Investment, which owns $2.2 billion worth.
Toromont’s competitive advantage
As the main distributor of Caterpillar equipment in Canada, Toromont enjoys a significant competitive advantage. In Canada, “Toromont CAT” is synonymous with Caterpillar, which gives Toromont a brand advantage. That fact frequently shows up in Toromont’s earnings. In the last 12 months, TIH grew its revenue 9.3%. In the last five years, it compounded its revenue, operating earnings, and net income at 5.7%, 13.6%, and 16.5%, respectively.
What happened in the fourth quarter
Having reviewed Toromont’s operations, we can now turn our attention back to its fourth quarter earnings release.
In the fourth quarter, TIH’s revenue and gross profit increased while its net income and diluted earnings per share (EPS) declined. The reason for the decline in earnings was a big increase in interest and income taxes. These factors are part of net income but not gross profit, which is why Toromont’s gross profit increased while EPS decreased.
Can we expect better earnings performance from TIH going forward?
The increase in interest expenses was a function of the Bank of Canada’s monetary policy. Toromont has $617 million in debt. When the Bank of Canada raises interest rates, that debt becomes more expensive to refinance, and the variable rate portion of it gets more expensive immediately. If the Bank of Canada keeps rates high, then TIH’s earnings will be negatively impacted. On the other hand, if the bank cuts rates, then TIH’s earnings should rise. If we assume that revenue keeps rising, then Toromont will eventually “outgrow” the increase in interest rates that occurred in 2022 and 2023. So, there is reason for optimism toward the stock even if rates stay high. On the whole, Toromont stock looks like a reasonable holding after its fourth-quarter earnings release.
