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Toromont (TIH) Stock | TSX: TIH.TO

The Certified Dealer

Toromont Industries Ltd. ("Toromont") is a Canadian industrial company. The company operates two business segments: Equipment Group and CIMCO. The larger segment by revenue, Equipment Group, includes a Caterpillar ("CAT") dealership and rental operation of construction equipment. CIMCO offers solutions for the design, engineering, fabrication, and installation of industrial and recreational refrigeration systems. The company operates primarily in Canada and derives a smaller portion of sales from the US.

Growth

52

Valuation

92

Quality

48
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Where Are We Now

Updated on: 11/8/2021

Conviction Score

7

Toromont might be dealing heavy machinery and equipment, but it is light on capital and debt usage. We think Toromont is a low-risk way to play increased government infrastructure spending and an economic recovery. The company is trading at a reasonable valuation but we would certainly caution investors to consider the cyclical nature of its business.

  • The Caterpillar dealer dominates Canada, especially on the East Coast and several other provinces and territories, including Ontario, Quebec, and Manitoba. Toromont is the heavy machinery “go-to” dealer across the country and it is also one of the largest “Cat” dealers in the world.

  • Toromont’s revenues increased 8% since last year and net profit is up 21%. Toromont’s equipment is essential to construction, agriculture, forestry, and manufacturing companies, among countless others.

The Basics

Toromont is a company based out of Concord, Ontario specializing in brand name equipment and product services specifically for industrial activities. The company has over 6,000 employees across 150 locations.

The company is split into two segments, each carrying specific business units:

Equipment Group:

  • Toromont Cat

  • Battlefield Cat Rental

  • AgWest Limited

  • SITECH Mid-Canada Limited

  • Toromont Material Handling

CIMCO:

  • CIMCO Refrigeration

Toromont generates revenue from the following product and service lines:

  • Equipment / Package Sales

  • Product Support

  • Rentals

  • Power Generation

Toromont Revenue by Segment (Q3 2021)

Source: Toromont Investor Relations

The Toronto-Montreal Origin

Toromont Industries was created when two Canadian investors, based out of Toronto and Montreal, came together to create their own company.

When both cities’ names are put together, they form Toromont.

Dating back to 1961, Toromont was a holding company that acquired companies in different industries to provide equipment and services.

Initially, Toromont acquired small companies such as Modern Handling Methods Limited, an equipment and materials handing company, and Lewis Refrigeration, a low temperature storage company.

Toromont became a public company in 1968.

It continued this trend of buying companies and entering new industries over the course of the next 25 years, progressively buying bigger companies such as CIMCO Refrigeration in 1969.

Because of the breadth of industries covered by its spree of acquisitions, Toromont eventually spread itself too thin, leading it into a period of decline.

In 1993, the company was fully restructured to prioritize heavy duty machinery and refrigeration.

Shortly after, Toromont acquired an Ontario Caterpillar Dealership and was given rights to distribute CAT-branded machinery.

The acquisition of an Ontario Caterpillar Dealership helped the business take off as the demand for heavy duty machinery started to ramp up. More companies began investing in infrastructure and construction.

To date, Toromont has continued to sell Caterpillar products in addition to manufacturing its own low temperature refrigeration units.

Business Units

Aside from its refrigeration unit, what makes Toromont interesting is that it does not manufacture the products it carries. Each of the five business units are certified dealers who purchase other companies’ products and resell them to consumers.

One of the biggest companies they it works with is Caterpillar Inc., who designs and manufactures heavy duty machinery. Caterpillar Inc. has created a worldwide dealer network with different companies to reach as many consumers around the globe as possible.

Toromont Cat Logo

Toromont Cat

Toromont Cat is one of the largest Caterpillar dealers in the world with 120 branches across seven provinces and one territory.

This business unit serves to distribute heavy equipment, power generation, and heavy rent equipment to the needs of public infrastructure, construction, mining, and trucking.

Toromont Battlefield Logo

Battlefield Equipment Rentals – The Cat Rental Store

This business unit distributes CAT equipment used by smaller businesses, contractors and Do-It-Yourself customers.

The products focus on landscaping uses but can also be used for specialty trades activities such as renovations, electric work, and material handling.

The business unit runs on a rent-or-purchase model whereby most customers rent equipment for a certain period of time.

Toromont Cimco Logo

CIMCO Refrigeration

CIMCO focuses on low temperature refrigeration equipment, catering to a plethora of industries such as food and dairy, pharmaceutical, automotive, and mining.

As previously mentioned, CIMCO was acquired by Toromont in 1969, and has been one of the company’s longest running operations. This is the one segment in Toromont’s business that manufactures and distributes its own products.

Toromont Material Handling Logo

Toromont Material Handling

This business unit focuses on a selection of lift trucks and container handles to transport and store goods.

Toromont Material Handling does not manufacture any of these products. Instead, it purchases and distributes them from suppliers such as Caterpillar, Mitsubishi, and Jungheinrich.

Aside from purchasing machinery and equipment from this product group outright, customers also have the option to rent.

Toromont Agwest Logo

AgWest Limited

AgWest offers year-round equipment and product support specifically for Manitoba’s agriculture industry.

It is a certified dealer of AGCO and CLAAS equipment. Both brands focus on precision farming and agriculture solutions.

Toromont Sitech Logo

SITECH Mid-Canada Limited

Unlike the rest of Toromont’s main segments, SITECH has a different focus — it provides services and software solutions to businesses.

This business unit specializes in machine control, site positioning, and asset management technologies for businesses.

The products that SITECH uses for its services are purchased from Trimble and CAT AccuGrade.

The Certified Dealer

The Business Model

Toromont’s business model is really quite simple.

After buying products directly from the manufacturer, Toromont carries these products in its store and resells them to consumers. It also facilitates the renting of these products for those who do not want to purchase equipment.

As the development industry continues to expand with companies injecting more money into building infrastructure, the demand for construction and heavy-duty machinery is growing.

This proves to be a positive tailwind for Toromont, being the largest dealer of heavy-duty equipment.

By 2025, the construction equipment market is set to reach $175 billion.

The Benefits

For five out of its six units, Toromont does not manufacture any of its products. These business units are known as certified brand dealers and purchase these products directly from manufacturers to resell them to consumers.

From a business perspective, this means that Toromont is able to minimize the risk factor around production. Since most of their products are bought from manufacturers, its only responsibility is to get the product into consumers’ hands.

In addition, Toromont is also able to cut back significantly on costs related to capital. There are little to no costs associated with manufacturing, aside from its refrigeration unit.

Both benefits come together to create a strong balance sheet, which helps Toromont invest back into the company. An example is their recent acquisition of Hewitt Equipment Limited in 2017.

This strong balance sheet has also helped the company consistently provide dividends since the company went public in 1968.

Toromont Revenue ($M) (Q3 2021)

Toromont EBITDA ($M) (Q3 2021)

The Brand Power

As Toromont mainly purchases its machinery from manufacturers such as CAT and Mitsubishi, it capitalizes heavily on the brand power that these products hold.

When consumers in the construction industry think about machinery, 9 out of 10 times, their first thought will be a big orange CAT vehicle.

Construction Equipment Sales (US$B)

Source: Rocktoroad

Competitive Advantages

Decentralization

Toromont is a decentralized company. Despite having over seven different business units, everything falls under one management team.

The Board of Directors are able to set the tone of the business through unified policies and corporate strategies to move Toromont as a unit compared to promoting each business unit as its own entity.

Essentially, Toromont cares about each of its units equally and ensures all of them perform to a certain standard of quality.

Toromont StrategySource: Toromont Investor Relations

Technology

Toromont invests heavily into digital tools to better serve its customers. These technologies help the company with forecasting future trends and understanding what parts of the business need improvement.

To stay on top of the curve, Toromont leverages three main tools:

  • Analytics and AI

  • Applications to remotely monitor equipment

  • Ecommerce Sites

Toromont has dedicated data scientists working on algorithms to better understand and predict the market. This, in turn, can help the business improve its market coverage in addition to inventory management.

In terms of applications to monitor equipment, there is software embedded within each and every one of its machines to monitor the health of the equipment. This is a great move to better serve customers as servicing can be done more efficiently and accurately. In addition, as Toromont does take on risk when renting out its equipment, it can monitor its machinery without having to worry about theft or damage.

The base use of ecommerce is simple. Instead of relying purely on in-person dealerships, customers can order and have their equipment shipped to them in a matter of clicks. Recently though, Toromont has been using its ecommerce site in other forms.

As with any machinery, maintenance and dead parts are very common. The typical gesture with a machine that does not work is to sell it to a junkyard for some compensation.

Toromont, on the other hand, has used its ecommerce site to open online auctions for attachments and working parts from dead machines. This is a great initiative as it allows the business to still generate revenue from something that was intended to go to a junkyard.

The Hewitt Acquisition

In 2017, Toromont acquired Hewitt Equipment Limited for $1 billion.

Hewitt Equipment would mainly sell CAT products in provinces such as Quebec, Western Labrador, and the Maritimes. Its business units centre around the mining, construction, power systems, and forestry industries.

Toromont Hewitt LogosSource: Le Magazine Électricité Plus

This acquisition helped Toromont expand its Caterpillar dealership to different parts of Canada.

Up until the acquisition, the company only had 46 dealerships across three provinces. Now, Toromont operates in seven different provinces and one territory, with over 120 different locations scattered across Canada.

This expansion was a big deal for Toromont as it can capitalize on CAT’s brand power by reaching a larger target market across new provinces.

Risks

Competitors

As Toromont does not manufacture a large portion of their products, it brings up the concern of product advantages. Why would a consumer choose Toromont over other competitors? As a business, Toromont is able introduce initiatives and implement strategies to better position themselves on the market, but at the end of the day, Toromont still sells the same kinds of products as a competitor, such as Finning International.

The only defining factors to encourage consumers to buy from Toromont are pricing and market presence.

This is not a major risk for Toromont now, as they have successfully been able to position themselves in the market while continually expanding to new regions. Its strategic course with prioritizing decentralization and using technology will help it get the upper hand against competitors.

The Reliance on CAT Products

Toromont mainly carries Caterpillar products in its dealerships as the products hold lots of brand power and are very popular.

In the short term, this is working for the business as the market for CAT products continue to grow, but what about long-term?

In the event Caterpillar starts performing poorly, it could be worrisome for Toromont.

Toromont should be looking to put more resources into other product lines to sell at its dealerships and deviate from this reliance on CAT products. Not only will it diversify the kinds of products that the business offers but will also help Toromont create a strong support system in the event one of its business units starts declining.

The Cyclical Nature of Products

One concern with Toromont is the cyclical nature of their products. Many of the industries that buy heavy duty machinery do not use the products all year round.

Industries such as mining cannot work during cold temperatures, thus are limited to the time they work.

This can pose a threat to Toromont as many products may sit on shelves for certain periods of the year. Machinery that sits idle for extended periods of time also bring up the risk of more maintenance.

Investors should look into how Toromont is dealing with this issue and finding ways to make up for periods of slow sales.

Bottom Line

Toromont is a distributor of some of the largest heavy duty machinery brands in the world.

Each of its six business units help to cater to the specific niches of the construction and infrastructure industry, giving consumers the ability to purchase and rent these products.

Toromont has a simple business model in buying products from manufacturers and then reselling them in its dealerships. This helps to mitigate risks associated with manufacturing and minimizes capital expenses.

The Hewitt acquisition allowed Toromont to expand its outreach to different parts of Canada, operating 140 locations in seven different provinces. This outreach in addition to the brand power that the products hold, ensures Toromont has growing top-line revenues.

Toromont has positioned itself well with its strategic growth drivers such as technology and decentralization. At the end of the day, it still sells the same products as competitors such as Finning International. The company will need to find ways to continually build a bigger moat.

With regards to Caterpillar products, the future success of these products is unpredictable and if the business ends up performing poorly over time, it may be a concern for Toromont.

Despite these risks, Toromont will continue to use the brand power that these products hold in addition to continually expanding its business to different parts of Canada, holding the title of the Certified Dealer.

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