Shares of Toromont Industries (TSX:TIH) seemed to be on a tear in the last year. Shares climbed higher and higher as the company providing capital equipment beat earnings per share (EPS) estimates again and again.
However, after hitting $135 per share, the stock has fallen back by about 4% as of writing. So, let’s look at what happened and whether now is the time to invest after the bad news.
What happened?
The drop in share price came earlier this month when an analyst downgraded TIH stock to “market perform” from “outperform.” Why? Because the analyst believes that the company won’t be able to provide a return that would reach the target share price.
TIH stock reached the company’s $135 per share price target, but the analyst doesn’t believe that there is going to be much more to give. There were a number of reasons for this. First, there was concern over a weak economic outlook in eastern Canada that could hurt the stock.
That being said, the analyst did state there are still some strong areas for TIH stock. These would include infrastructure, power, and mining, for instance. Yet the eastern Canadian issue remains a focus. This comes from elevated interest rates, a slow Ontario housing start, and softer year-over-year equipment rentals.
Should you drop it?
The thing is, the analyst doesn’t believe that investors should go ahead and sell the stock. Instead, they just feel the company has gone as far as it can in these circumstances. In fact, TIH stock continues to hold a “fortress balance sheet,” according to the analyst. What’s more, they demonstrate “intense” operating discipline.
As for long-term growth, there is still some strong near-term risk/reward for those wanting to hold the stock long term. However, investors may want to wait until earnings. That’s because there could be a further drop in share price, and this could add more value.
Should this happen, the analyst believes that there could be another healthy surge in share price and multiple expansion. Right now, the stock trades at 20.26 times earnings, with shares up 20% in the last year alone.
Into earnings
With earnings on deck, let’s take a quick look at the past few quarters to see where we might see more momentum. The second quarter for TIH stock saw revenue hit $1.175 billion, with basic earnings per share (EPS) at $1.69. By the third quarter, this fell back to $1.174 billion, with basic EPS rising got $1.77 on strong net earnings.
The fourth quarter brought in more revenue, hitting $1.227 billion, and basic EPS at $1.87. What’s more, the company made it clear that it continues to hold a strong financial position and long-term outlook. In fact, this allowed the stock to increase its dividend by 11.6%, marking its 35th consecutive year.
While the company didn’t provide any guidance, management stated they are “mindful” of the uncertain economic environment. They will continue to remain disciplined in terms of operational expenses and have a strong backlog and balance sheet entering 2024.
Bottom line
If you’re all right with some near-term volatility, TIH stock could be a good buy. But I would wait until after earnings. Shares could drop if this analyst is correct, and its EPS is currently predicted to reach around $1.13. Even if the company handily beats this, if there isn’t positive momentum from past quarters, it could be the start of a drop.
And that’s when you can find a great deal and potentially an even higher dividend. All while remaining patient as this long-term growth stock eventually recovers in this rough economic environment.
