Toromont is the better industrial buy

Toromont LISTEN:  

TOROMONT INDUSTRIES LTD. $66 (Toronto symbol TIH; High-Growth Dividend Payer Portfolio; Manufacturing & Industry sector; Shares o/s: 81.3 million; Market cap: $5.4 billion; Dividend yield: 1.4%; Dividend Sustainability Rating: Above Average; distributes a broad range of industrial equipment, including machinery made by Caterpillar. It also makes refrigeration systems through its CIMCO division.

The company has raised its dividend annually for the last 29 years. In April 2018, it lifted that quarterly payment by 21.1%, to $0.23 from $0.19. The new annual rate of $0.92 yields 1.4%.

In October 2017, Toromont completed its acquisition of privately held Hewitt Group. Hewitt is the exclusive distributor of Caterpillar equipment in Quebec and Atlantic Canada. The purchase price was $1.02 billion—$917.7 million in cash and 2.25 million Toromont shares. Hewitt should add $1.0 billion to the company’s annual revenue.

Toromont borrowed most of the cash it needed for the acquisition. That increased its long-term debt from $150.0 million (as of June 30, 2017) to $743.7 million (as of June 30, 2018). Despite that jump, its debt is still a moderate 14% of its market cap. It also held cash of $279.7 million.

Revenue in the latest quarter jumped 81.1%, to $961.3 million from $530.9 million a year earlier. Hewitt contributed $348.7 million in the quarter. Excluding the new business, the company’s legacy operations saw sales climb 15% during the quarter with healthy increases for all business lines.

Earnings rose 66.9%, to $67.6 million from $40.5 million. Per-share earnings increased 59.6%, to $0.83 from $0.52, on more shares outstanding. Hewitt contributed $18.7 million to the company’s second quarter earnings.

The stock has gained 46% since it announced the Hewitt acquisition. It now trades at 25.5 times the $2.59 a share that Toromont will probably earn in 2018. Savings from that acquisition could push up its earnings in 2019 to $3.30 a share. The stock trades at a more reasonable 20.0 times that forecast.

Toromont is a buy.

STANTEC INC. $33 (Toronto symbol STN; Cyclical-Growth Payer Portfolio, Manufacturing & Industry sector; Shares outstanding: 113.9 million; Market cap: $3.8 billion; Dividend yield: 1.7%; Dividend Sustainability Rating: Above Average; sells a range of consulting, design and technology services to clients in the oil and gas, transportation and construction industries.

With the April 2018 payment, Stantec raised its quarterly dividend by 10.0%, to $0.1375 from $0.125. The new annual rate of $0.55 yields 1.7%.

The company continues to fuel its growth with acquisitions. Recent purchases include U.K.-based Peter Brett Associates, an engineering firm involved in a number of huge projects. They include the Thames Tideway Tunnel project—London’s largest sewer upgrade since the Victorian era. Stantec is also buying True Grit Engineering, a Thunder Bay consulting firm that specializes in infrastructure engineering and project management.

In the three months ended June 30, 2018, the company’s revenue rose 2.2%, to $907.8 million from $888.4 million a year earlier. Earnings dropped 19.7%, to $46.5 million from $57.9 million. Per-share earnings fell 19.6%, to $0.41 from $0.51, on fewer shares outstanding.

If you exclude acquisitions, revenue from the company’s Canadian consulting services increased by 6.9%. That’s followed by a 3.9% rise from global consulting and a 3.3% gain for its U.S. businesses.

Stantec cuts its costs by having its businesses share administrative expenses, financing and employee benefit plans. However, its strategy of using acquisitions to expand increases the risk of writedowns.

Stantec is a hold.


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