Analyst cites Toromont’s outstanding record of value creation

Toromont Industries Ltd. (TIH–TSX) is one of the world’s biggest dealers of equipment made by Caterpillar Inc. (CAT–NYSE).

Headquartered in Toronto, Toromont is the exclusive dealer of Caterpillar heavy equipment for Ontario, Manitoba, Newfoundland, as well as for most of Labrador and Nunavut. It gets about 85 per cent of its revenue from equipment distribution.

It’s also extremely well managed, says Odlum Brown analyst Stephen Boland who cites its “excellent record of capital allocation,” along with its “outstanding record of value creation over the long term.”

Given such praise, how could Mr. Boland recommend Toromont as anything but a “buy”? This is exactly what he does. He also continues to hand it a 12-month price target of $31.50 a share. He writes:

Toromont’s attractive business model resembles the razor/razorblade setup. Although it sells equipment at a modest markup, it offers product support — both parts and services — over the life of the equipment, but at a much higher margin.

Toromont’s reputation for service, along with its strong brands, helps generate robust sales of new equipment. This, in turn, creates a large installed base upon which to earn revenue from product support.

Moreover, the long life of the equipment means that for many years, the company can earn product support revenue that’s relatively stable. Indeed, Toromont typically gets more than 30 per cent of its revenue this way.

Not only is the company’s corporate culture geared for long-term performance, but its organization is structured to succeed. And because its operations are highly decentralized, decision-making is close to customers, as well as close to end markets.

And although Toromont makes capital allocation decisions at its head office, its managers are held accountable for their performance.

Moreover, the company is shareholder-friendly, having paid out dividends every year since 1969 and having raised them each year over the past 24 years.

In addition, its stock has done well. Not only have its shares significantly outperformed the S&P/TSX since the mid-1980s, but they’ve even left Warren Buffett’s Berkshire Hathaway Inc. (BRK.A–NYSE) in the dust.

 

Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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