Toromont is a heavy equipment dealer that mainly sells Caterpillar trucks and equipment across the country.
The company is known for providing specialized capital equipment and services to a set of customers across a number of different end markets. It operates through two business groups: Equipment group (Toromont CAT, Battlefield, Sitech) and CIMCO (refrigeration business). The Equipment group is the larger segment accounting for ~95% of total revenues. Most of its businesses are industry leaders in areas they operate. Toromont CAT is one of the world’s larger Caterpillar dealerships, Battlefield is an industry-leading rental operation; and CIMCO is a market leader in the design, engineering and after-sale support of refrigeration systems in industrial and recreational markets.
New and used equipment accounted for 42% of revenues in 2019, followed by product support (42%), rental (11%) and refrigeration equipment (5%). The company has a presence in more than 150 locations across Canada and the United States. Ownership of an extensive branch and dealer network, fleets of service vehicles, and proven logistics and technology capabilities are Toromont’s strong competitive advantages.Investment Data
- Opportunity Score: 64
- Ticker: TSE:TIH
- Sector: Industrials
- Industry: Industrial Distribution
- Market Cap: 6.82B
- P/E: 26.38
- Dividend Yield: 1.49%
- Payout Ratio (Earnings): 39.49%
- Canadian Dividend Aristocrat: YES
- Chowder Score: Members Only
- Revenue Growth: Members Only
- Dividend Growth: Members Only
- Dividend Growth Fit: 8/10
- Dividend Income Fit: 5/10
Revenue Growth & Market Exposure
With more than five decades of existence, Toromont has a proven track record of steady growth. The company has established a strong footing in diverse markets that offer significant long-term growth opportunities. Toromont delivers specialized capital equipment to a diverse range of customers and industries. Toromont’s huge network of distribution channels, leading product lines, and strong relationships with suppliers and business partners have been critical in achieving growth objectives.
About 70% of Toromont’s revenues are from the CAT dealership which represents a predictable source of income. Moreover, the company has a good diversity across geographies, customers, products and markets. By industry, construction (30%+) and mining (20%+) are the largest. The company has been increasing the share of product support and rental revenues to total revenues in order to improve profitability. It also plans to expand its geographical footprint and increase market share.
Toromont is growing organically and through acquisitions. The largest acquisition being that of Hewitt Group of companies in 2017, which increased Toromont’s reach throughout Eastern and Central Canada and the Far North. The company is making good progress in its integration. As Canada’s largest heavy equipment dealer, Toromont is expected to benefit from an increasing footprint across Quebec and Atlantic Canada. The rental market growth opportunity is tremendous as Toromont commands just 14% of the total market share today.
Toromont’s Q2 revenues declined by 13% due to lower economic activity as a result of the pandemic. Construction shutdowns and slowdowns resulted in lower equipment sales. Product support and rental revenues also declined by 16% and 31% respectively, while equipment sales were down 6%, due to lower new equipment sales across most markets.
Toromont owns a business with consistent revenues of over $1 billion annually. The combination with the Hewitt group of Companies is expected to lead to almost $3 billion in annual revenue. Prior to the outbreak, the long-term outlook for infrastructure projects and other construction activity was positive across most territories. The company has a large base of mining customers and the outlook for mine expansion is also positive in the long term. Toromont should fare well once the economic activity resumes.
Toromont is a Dividend Aristocrat paying dividends since 1969 and increasing them for more than 30 consecutive years. It is amongst a few Canadian companies having the longest dividend-growth streak. The company has grown its dividends by more than 12% CAGR in the last decade. It last announced a 14% hike in its regular quarterly dividend. Toromont sports a modest dividend yield of 1.65% but has a reasonable payout ratio of 39%.
The integration of Hewitt and the transition process is progressing well. The earnings accretion since the transaction closing has also exceeded expectations over a relatively short period of time. The acquisition contributed more than $1.5 billion in revenues in the last two years (2018 and 2017). Significant investment opportunities in the form of rolling out the rental footprint exists, where most of the expenses are incurred in the initial time period while revenues are earned in a recurring manner.
Toromont has continued to make significant investments in its rental fleets, branches and plants over the past five years. It ended the quarter with a backlog of $228 million that increased by 54% YoY, and the company expects nearly 70% of the backlog to be realized as revenue this year, depending upon the resumption of economic activity and COVID infection levels. Toromont has a strong financial position with cash of $537 million, available liquidity of $616 million and a strong balance sheet. The acquisition of Hewitt further represents a substantial growth opportunity for Toromont Industries and strengthens the company’s expertise and operations in mining, construction, power systems, etc.
The only major competition for Toromont Industries is Finning International in Canada. Most of the Caterpillar dealer network is primarily operated by either Toromont or Finning. Finning International is the world’s largest Caterpillar dealer, having a large presence in Canada, UK & Ireland, and South America. The company has been around for the last 85 years and caters to a wide range of customers in various industries such as mining, construction, petroleum, forestry, and power systems. Toromont operates in very competitive equipment and construction markets. Wajax and SMS Equipment are the other top competitors.
Toromont serves critical businesses like food, power generation, critical infrastructure, transportation and emergency response. Diversified businesses and financial strength position it well to weather the current crisis situation. Toromont’s investment in rental equipment, developing product support technologies, and large product lines should also contribute to long-term growth once things get back to normal. The company has a sound track record of 52 years of dividend payments and should continue its dividend growth streak in the future.
DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.