AVL Acquisition And Growing Backlogs Will Drive Future Success In Power Generation

Key Takeaways

• Strategic acquisitions and disciplined capital allocation are set to enhance growth and earnings in key markets, highlighting a sustainable revenue strategy.
  
• Focus on expanding technician recruitment and aftermarket services is likely to boost product support revenue, improving net margins over time.
  
• Increased reliance on cross-border trade and currency fluctuations could strain margins and pressure profits due to higher costs and competitive pricing.

Catalysts

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

• The Equipment Group's focus on leveraging a strong order backlog in construction and mining segments, coupled with improving rental market utilization, is expected to boost future revenues and earnings.
  
• The acquisition of a 60% stake in AVL Manufacturing positions Toromont to enhance its power generation enclosures segment, potentially increasing earnings through strategic expansion in a high-demand market.
  
• CIMCO's growing backlog, particularly in the recreational and industrial segments, highlights strong future growth prospects, likely driving revenue increases as projects are realized.
  
• The concentration on disciplined capital allocation to support organic growth initiatives and acquisitions, such as Tri-City and AVL, indicates a strategic approach to achieving sustainable revenue and earnings growth.
  
• Toromont's investment in expanding technician recruitment and aftermarket services suggests an anticipated increase in product support revenues, contributing to improved net margins over time.

Toromont Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Toromont Industries's revenue will grow by 3.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.1% today to 11.1% in 3 years time.
• Analysts expect earnings to reach CA$611.2 million (and earnings per share of CA$7.49) by about April 2028, up from CA$506.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.4x on those 2028 earnings, up from 18.2x today. This future PE is greater than the current PE for the CA Trade Distributors industry at 12.4x.
• Analysts expect the number of shares outstanding to decline by 1.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.9%, as per the Simply Wall St company report.

Toromont Industries Future Earnings Per Share Growth

Risks

• Increased investment in non-cash working capital and higher inventory levels could pressure cash flow if not managed effectively, impacting future revenue and earnings.
  
• The reliance on cross-border trade between the U.S. and Canada makes the company susceptible to new tariffs, which could increase costs and reduce net margins.
  
• The depreciation of the Canadian dollar relative to the U.S. dollar may result in higher costs for U.S.-sourced equipment and parts, which could affect gross profit margins.
  
• A high level of future bookings in the data center market may not immediately reflect in revenue, impacting near-term earnings.
  
• Competitive pressures in the equipment market, including pricing from international competitors, may compress margins and impact overall profitability.

Valuation

• The analysts have a consensus price target of CA$137.167 for Toromont Industries based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$5.5 billion, earnings will come to CA$611.2 million, and it would be trading on a PE ratio of 21.4x, assuming you use a discount rate of 6.9%.
• Given the current share price of CA$113.37, the analyst price target of CA$137.17 is 17.3% 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.