Acquisition Of Tri-City Equipment Rentals Will Expand Future Revenue Streams

Key Takeaways

• Acquisition of Tri-City Equipment Rentals and improved equipment availability aim to expand heavy rents and boost future revenue streams.
  
• Focus on technician investment and mining growth is expected to enhance service revenue and support better margins and earnings.
  
• Despite revenue growth, decreasing net income, declining profit margins, lower rental revenue growth, and increased working capital indicate potential challenges in profitability and liquidity.

Catalysts

Provides specialized capital equipment in Canada, the United States, and internationally.

• The acquisition of Tri-City Equipment Rentals is expected to expand Toromont Cat's heavy rents business, aligning with the company's positive view of the rental market, potentially boosting future revenue.
  
• Improving equipment availability and a strong opening order backlog provide a foundation for increased revenue as the company continues to execute against its order backlog.
  
• Continued investment in technician workforce and focus on product support could result in higher service revenue, positively impacting net margins over time.
  
• Anticipated growth in mining equipment deliveries and utilization is likely to increase future product support sales and enhance earnings.
  
• The company is committed to disciplined capital deployment, including share buybacks and organic growth, which could improve return on equity and bolster earnings per share.

Toromont Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Toromont Industries's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.2% today to 10.8% in 3 years time.
• Analysts expect earnings to reach CA$585.7 million (and earnings per share of CA$7.32) by about December 2027, up from CA$504.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.2x on those 2027 earnings, up from 18.1x today. This future PE is greater than the current PE for the CA Trade Distributors industry at 18.0x.
• Analysts expect the number of shares outstanding to decline by 0.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.63%, as per the Simply Wall St company report.

Toromont Industries Future Earnings Per Share Growth

Risks

• Despite the revenue growth, net income decreased by 10% due to lower profit margins and higher expenses, which could continue to impact earnings if market conditions do not improve.
  
• Gross profit margins declined, partly due to an unfavorable sales mix with a lower proportion of higher-margin product support revenue, potentially affecting overall profitability.
  
• Within certain segments like Equipment Group, rental revenues are showing lower growth or declines, driven by persisting softer market conditions, particularly in residential construction, which could weaken future revenue prospects.
  
• A significant buildup in working capital, driven by higher inventory levels and accounts receivable, indicates potential liquidity risks, which may pressure balance sheets if not managed effectively.
  
• Although demand in mining is typically volatile, the decrease in backlog for the Equipment Group suggests potential future revenue volatility, especially if the trend persists.

Valuation

• The analysts have a consensus price target of CA$133.89 for Toromont Industries based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$150.0, and the most bearish reporting a price target of just CA$122.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CA$5.4 billion, earnings will come to CA$585.7 million, and it would be trading on a PE ratio of 22.2x, assuming you use a discount rate of 6.6%.
• Given the current share price of CA$111.19, the analyst's price target of CA$133.89 is 17.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.