Toromont Industries (TSX:TIH, Financial) is a company in the heavy truck and equipment industry that I highly recommend. It is a Canadian company that provides capital equipment and is expected to have strong financial performance this year due to positive prospects for infrastructure projects in North America and the expansion of its product and service offerings. Additionally, the company's efforts to improve efficiency are expected to increase its margins. The stock also has strong defensive qualities, including a high safety ranking and high earnings predictability, as well as a decent and growing dividend.
About the company
Toromont is based in Ontario, Canada that provides capital equipment mostly in Canada but also has a small presence in the United States. It is divided into two segments: the Equipment Group and CIMCO. The Equipment Group, which made up 91% of the company's revenue and 92% of its operating income in 2021, sells, rents and services equipment from Caterpillar (CAT, Financial) and other manufacturers to various industries, including commercial and industrial businesses, marine operations and power generation companies. CIMCO, on the other hand, designs and installs industrial and recreational refrigeration systems.
Toromont Industries acquired the Hewitt Group in October of 2017 and as of 2021, the company's chairman is Robert M. Ogilvie and the president and CEO is Scott J. Medhurst. The company's headquarters are located in Concord, Ontario.
Toromont Industries' main competitor in Canada is Finning International (TSX:FTT, Financial), which is the largest Caterpillar dealer in the world and has a strong presence in Canada, the UK, Ireland and South America. Both Toromont and Finning operate in the Caterpillar dealer network and compete in the equipment and construction markets, with Wajax (TSX:WJX, Financial) and SMS Equipment being other top competitors. Finning serves a variety of industries, including mining, construction, petroleum, forestry and power systems, and has been in operation for 85 years. As we can see, Toromont operates in highly competitive markets.
Financials and valuation
The company's stock price has performed impressively over the last decade, delivering an over 400% cumulative return.
The company has a high return on invested capital (ROIC) that is far above its weighted average cost of capital (WACC).
The following is a breakdown of the company's most recent annual income statement.
The following is a representation of Toromont's operating cash flow and its components. Note the orange line which is the Core FCF (Free Cash Flow without changes in working capital). Core FCF has increased at a 20% annualized rate over the last 10 years.
Following is a depiction of Toromont's balance sheet as of September 2022. As we can see, the balance sheet is strong and flexible with low debt and plenty of cash.
As of Sept. 30, 2022, Toromont Industries had total debt of $646.9 million, with $150.0 million of that debt due within five years. The company had long-term debt of $646.9 million and long-term interest of $31.0 million, for a total interest coverage ratio of 17.2. Toromont also has leases with annual rentals of $9.9 million, pension assets of $286 million and obligations of $342 million as of December 2021.
The company does not have any preferred stock. Toromont has 82,246,807 shares of common stock, giving it a market capitalization of $8.6 billion and placing it in the mid-cap range.
The company has a $500 million revolving credit facility and expects to fund investments in capital assets through cash flow from operations and available credit facilities.
The dividend yield for Toromont Industries is currently 1.6% both on a trailing 12-month and forward basis. The company has a dividend payout ratio of 14.7%, which is very low. The company's dividend growth rate over the past five years is 3.18%.
The company has an impressive and well-balanced GF Score of 95 out of 100.
Industry outlook
The outlook for the heavy truck and equipment industry is mixed, with some companies in the industry posting strong financial performance due to robust demand, including replacement of aging fleets and high utilization rates, and others benefiting from recent infrastructure spending in both Canada and the U.S.
However, the industry is also facing challenges such as supply chain constraints, high inflation, rising costs for materials and labor and concerns about a potential recession.
Despite these challenges, many companies in the heavy capital equipment industry are expected to have strong pricing power, higher sales and earnings in the coming year compared to 2021. Toromont Industries is my top pick in the industry, as I believe it could have strong financial performance due to positive prospects for infrastructure projects in North America and the expansion of its product and service offerings. The company enjoys secular tailwinds as the vast Canadian mining sector is on an strong upswing with strong natural resources pricing in an inflationary environment.
While shares look expensive at a price-earnings ratio of 20.6, I think the price is reasonable given that the company has increased earnings per share at an over 14% pace over the last five years. The company's outstanding growth, return on invested capital and return on equity metrics as well as defensive attributes like a strong balance sheet and favorable demand environment make the stock attractive in my opinion.
