Topic: Growth Stocks

Heavy equipment distributor gets a lift from big acquisition

Based on the evidence so far, this 2017 acquisition looks like a good fit.

With its heavy equipment franchises in Quebec and Atlantic Canada, this newly acquired firm seems like an ideal complement to this stock’s dealerships in Ontario, Manitoba and Nunavut. As a bigger company, its revenues rose in the latest quarter, along with its share price and its dividend.

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TOROMONT INDUSTRIES LTD.  (Toronto symbol TIH; distributes a broad range of industrial equipment, including machinery made by Caterpillar. It also makes refrigeration systems through its CIMCO division.

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 new operations nicely complement Toromont’s existing Caterpillar branches in Ontario, Manitoba and Nunavut. As well, Hewitt helps the company profit from new mining and infrastructure projects in Quebec.

The $1.02 billion price consisted of $917.7 million in cash plus 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 $743.5 million (as of March 31, 2018). Despite that jump, Toromont’s debt is still a moderate 16% of its market cap. It also held cash of $171.3 million.

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As a result of the Hewitt purchase, Toromont’s revenue in the quarter ended June 30, 2018, jumped 81.1%, to $961.3 million from $530.9 million a year earlier. Earnings rose 67.1%, to $67.6 million from $40.5 million. Per-share earnings increased 62.7%, to $0.83 from $0.51, on more shares outstanding.

If you exclude the contribution from Hewitt and unusual items, Toromont earned $0.68 a share in the quarter. That beat the consensus estimate of $0.67.

The stock has gained 30% since it announced the Hewitt acquisition. The shares now trade at 22.7 times the $2.84 a share that Toromont will probably earn for all of 2018. That’s an acceptable p/e, particularly as the company’s earnings continue to expand on more gains from the Hewitt purchase.

Savings from that acquisition could push up its earnings in 2019 to $3.30 a share. The stock trades at a more reasonable 19.5 times that forecast.

The company has also 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. Toromont’s dividend has grown an average of 12.0% annually over the last 5 years. The new annual rate of $0.92 yields 1.6%.

Recommendation in The Successful Investor: Toromont is a buy.

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