Bull List Report – Toromont Industries TSE:TIH

Toromont Industries – TIH.TO

Toromont Industries Ltd is a Canadian industrial company. The company operates two business segments: Equipment Group and CIMCO. The larger segment by revenue, Equipment Group supplies and rents mobile and stationary machines used in road building, mining, aggregates, public infrastructure, residential construction, power generation, agriculture, forestry, truck engines, industrial, demolition and waste management. CIMCO offers solutions for the design, engineering, fabrication, and installation of industrial and recreational refrigeration systems. The company operates majorly in Canada and derives a smaller portion of sales from the United States of America and other regions.

Focus area	Score
Valuation	40
Profitability	43
Risk	72
Returns	92
Dividend	74
Outlook	30
Debt	73
Growth	27
Overall	48

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Pros

A decade-long history of strong returns on capital and equity
The company’s debt structure and balance sheet are sound
The company’s free cash flow per share has grown by over 550% over the last decade
Although the company isn’t cheap by any stretch, it is trading at a double-digit discount to historical averages across virtually every metric. The last time Toromont has been this cheap, shares went on to outperform the market over the following 5 years
After a relatively flat 2024, the company is expected to get back to double-digit growth in 2025
The company has a 34-year dividend growth streak and double-digit annualized dividend growth
Although the company’s primary mining exposure is to gold, the growth of the EV sector presents new opportunities with different precious metals
Toromont’s backlog is relatively strong, considering the economic situation

Cons

The company is heavily exposed to the Canadian economy and Canadian mining sectors
It relies on the strength of Caterpillar sales
As an industrial player, it is prone to cyclical economic conditions, which could cause short-term weakness in share price
The Canadian economy could continue to weaken amidst potential tariffs
The company is known to issue shares

We love rock-solid compounders here at Stocktrades, and Toromont is just that. The company is one of the largest Caterpillar dealers in North America. It generates the bulk of its revenue (more than 90%) from its equipment segment. Its CIMCO segment makes up around 10% of revenues and primarily focuses on developing industrial-grade refrigeration systems. Think of things like freezers for food processors and even ice hockey rinks.

The company is now at what I believe to be the bottom of a cyclical downtrend. Looking to the company’s backlog and order numbers, we can see that activity is going to start picking back up. The company has stated that orders have remained relatively cautious from customers due to the higher interest rate environment, and if the Bank of Canada continues to reduce interest rates, we should see a pickup in economic activity on practically all fronts, including oil and gas, mining, and construction. Toromont has significant exposure to all this through both the selling and renting of heavy-duty equipment.

Although it is a smaller portion of revenue, its CIMCO segment is benefitting significantly from companies that wish to improve energy efficiency and reduce greenhouse gas emissions. Ultimately, global warming and the demand for companies to reach carbon neutrality should be a tailwind for this end of the business. As it continues to outpace equipment growth, it will become a larger portion of the business.

Despite some reasonably harsh economic circumstances, the company has continually maintained 15%+ returns on invested capital and 20%+ returns on equity. It takes on debt sparingly, and with only around $600M in long-term debt, the company is going to be able to continue to invest more capital back into the business and generate long-term shareholder returns.

At this point in time, I view the company as somewhat of a value play with a strong element of dividend growth behind it. The company is currently trading at 11.6X EV/EBITDA, which represents a double-digit discount from historical averages. Typically, whenever I see Toromont hit these types of valuations, it tends to go on an upwards run afterwards to get back to historical averages.

To cap this off, we have a company with a 34-year dividend growth streak and a 5-year average dividend growth rate of 10.5%.

Beta	0.67
Best monthly return	10.7%
Worst monthly return	-6.9%
Max drawdown	22.2%

As you can tell by the numbers above, Toromont is very much a low-volatility play. Although it doesn’t have large monthly gains, it also has low monthly losses and one of the lower max drawdowns of any stock featured here at Stocktrades Premium.

With Toromont being a supplier of heavy equipment and refrigeration systems, it generally benefits more from a healthy economy. This is precisely why the stock is caught up in a bit of a downtrend, trading sideways for the better part of two years.

If the economy continues to weaken, rental and equipment sale demand will no doubt fall, causing results to slump. Outside of the economic cyclicality of the company, it also has heavy exposure to the mining industry, and as such, when commodity prices fluctuate, results will often fluctuate. During periods of high oil and gold prices, companies will often purchase and lease more equipment to take advantage of higher prices. When commodities dip, they’ll do the opposite.

The company is also heavily exposed to the Canadian economy. Considering Canada’s exposure to the demand for heavy equipment (precious metal mining, oil and gas extraction), this is to be expected, but it is still somewhat of a risk. A weaker Canadian economy could ultimately produce weaker results.

Finally, although Toromont has ultimately been the better company and has had a larger presence over the years, it does have some competition in North America via Finning, another Caterpillar retailer. Although there is plenty of space for both in the sector, the possibility of Toromont losing market share to Finning must be considered.

	TTM	Historical average	Forward numbers
P/E	22.1	20.9	22.5
EV/EBITDA	11.5	12	–
Earnings Yield	4.5%	–	–
P/FCF	60.5	–	–
PEG ratio	-2	–	–

Toromont was trading at a discount to both its 5 and 10-year historical valuations on practically all fronts. However, the recent runup in share price and its 23%~ returns YTD have erased that gap.

I had mentioned that when Toromont starts trading at double digit discounts to historical averages, a large runup typically occurs over the next few years. Although it is early, this looks to be the case yet again.

For example, when the company traded at 9X EV/EBITA in 2016, its shares would go on to double over the following 3 years. When it traded at 9X EV/EBITDA during the COVID-19 pandemic, its shares would double over the next 2 years.

In 2023, the company hit 10X EV/EBITDA, and its share price would go on to increase 30%~ over the next year.

Should we expect Toromont’s share price to double now that it sat at these lows? It is unlikely, but it’s also important to understand we don’t need the company’s share price to double over the next couple years to make this a viable investment.

If we consider ourselves to be at the bottom of a cyclical downtrend in the economy, Toromont should be able to benefit from its valuation trending back toward historical numbers. A pickup in the Canadian economy and mining sector would fuel bottom-line growth in the future, ultimately driving its share price upwards as well.

It’s not just me who views the company as undervalued either. Toromont has been known to issue shares in the past to provide funding. However, at this point in time, the company has begun to repurchase shares, a sign management sees not only a discounted share price but also a promising future outlook.

	Toromont (TIH)	Finning (FTT)	Caterpillar (CAT)
Operating margins	13.4%	7.4%	20.2%
5-year revenue growth	5.7%	7.5%	3.8%
5-year EPS growth	16%	19.5%	15.5%
5-year annualized return	10.6%	12.4%	22.2%
ROIC	14.8%	10%	19.1%

When you first look at this chart, you’ll probably notice that Caterpillar is the dominant company in terms of results all around. However, we do need to understand that these are competitors in a way, but also 2 very different business models. Caterpillar is the OEM (Original Equipment Manufacturer), whereas Toromont is a dealer and distributor. It doesn’t manufacture the equipment but sells and services Caterpillar products. Caterpillar will have exposure to things like financing as well, which adds another element of revenue, but also another element of risk.

When we look to Finning, Toromont has outperformed the company extensively over the last decade. However, over the last 5 years the returns have been much closer. The outperformance from Finning over the last half decade in terms of annualized returns is simply from its large runup over the last year. Outside of this, the companies have performed lockstep over the last 5 years.

Toromont has been the much better managed company, providing stronger revenue and earnings growth. It has a better margin profile, stronger returns on invested capital, and a much better balance sheet. That is not to say Finning is a poor company, I just view Toromont as the stronger long-term option.

Because of Finning’s rough performance leading up to the pandemic, valuations were relatively discounted compared to something like Toromont, which produced more consistent results. The short-term outperformance here is likely the result of a valuation gap closing. Although Finning still remains the cheaper play, primarily due to the larger-scale exposure to much more cyclical industries, I believe Toromont is the higher quality company.

Yield	1.5%
Payout ratio (EPS)	31.6%
5-year dividend growth %	12.2%
Money Spent/Received on Buybacks and Share Issuances	$160M

Toromont is one of the strongest dividend growth stocks in the country, with a consistent history of double-digit dividend growth and a 35-year dividend growth streak. With the strong returns on capital that Toromont has, the company doesn’t necessarily prioritize the dividend.

In fact, historically, investors have been better off letting the company invest the money internally to generate strong shareholder returns. This is a significant reason why the company has grown the dividend at a double-digit clip for a long time yet still only yields in the 1.5% range.

The company raised the dividend by 8.3% to close out Fiscal 2024. As mentioned above, this will be its 35th straight year of dividend growth.

Its payout ratio sits at just 31%~, which likely means the company will be able to continue to grow the dividend at a double-digit clip regardless of economic circumstances. As long as the company can continue to provide strong internal returns with the earnings it generates, it is unlikely the company will become a high-yielding option for Canadians. However, because the dividend is just one element of total returns, I am perfectly fine with this.

In terms of buybacks, the company hasn’t been overly aggressive but has started buying back shares at a moderate pace. After a long string of issuances from 2018 to 2021, the company has now reduced its share count for the better part of 3 years. As mentioned, it doesn’t utilize a lot of dollars to buy back shares, but it has started to buy them back (around $160M over the last year) and could certainly accelerate their buyback activity if prices remain attractive.

Last quarter	EPS	Revenue
Expectations	$1.49	$1.35B
Reported	$1.52	$1.37B
Surprise	1.76%	1.81%

Annual estimates	EPS	Revenue
2025	$5.92	$5.12B
2026	$6.49	$5.36B
2027	$7.05	$5.5B

Toromont capped off an outstanding Fiscal 2025 with some solid results. The stock is now nearly a double since our addition to the Bull List, and I still do believe the company has some room to run over the next 5-10 years here on infrastructure rollout.

Revenue for the year increased 4%, while the fourth quarter saw a larger 9% jump, fueled primarily by the Equipment Group and strong performance from Cimco. While full-year net income saw a decline of 2% compared to 2024, this was largely because of strategic growth investments and non-cash costs in relation to its acquisition of AVL. The market isn’t really all that concerned with profits right now, as they should improve next year.

The Equipment Group remained the primary growth engine and the bulk of revenue. Revenue increased 9% in the quarter and 3% on the year. Growth can be attributed to the integration of AVL, higher rental income (up 9% year-to-date), and steady maintenance revenue.

So, despite all this, why only a 3% increase on the year? Because the mining sector showed its characteristic “lumpiness,” with equipment revenue decreasing 39% in Q4 against a very strong prior year. But, considering future bookings surged by 324%, the market yet again shrugged this off because the positive forward outlook.

The Power Systems segment also saw a massive 131% revenue increase in Q4. When I say AI is hitting every industry, I mean it. The surge in popularity of data centers is driving this segment.

Cimco, Toromont’s refrigeration segment, reported strong results with a 14% annual revenue increase and a 20% increase in operating income. Growth was particularly strong in the recreational market, which grew 51% over the year as the company realized a lot of revenue from a deep backlog of ice rink and facility projects across Canada and the U.S.

Financially, Toromont’s balance sheet is rock-solid, ending the year with $1.3 billion in cash and only around $800M in debt. This liquidity allowed the company to increase the quarterly dividend by 7.7%, marking the 37th consecutive year of dividend increases. While Return on Equity (ROE) of 16.9% came in below the company’s long-term target of 18%, the impression I got from management is that they are not worried.

With a total backlog of $1.5 billion, up 46% year-over-year, and a proactive plan to mitigate trade and currency volatility, Toromont is well-positioned to navigate the infrastructure projects anticipated for 2027 and beyond.

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