Business Focus:

Toromont Industries Ltd. (TIH): TIH operates as a specialized equipment rental and dealership for construction, and the company also designs and installs refrigeration systems in industrial markets under the brand CIMCO. TIH is one of the world’s largest, exclusive Caterpillar dealerships in some of the geographic regions in Canada. The company mainly generates revenue through two key services including Product Sales, Rental of specialized equipment and Product Support services which include the sale of parts and performance of service work on equipment. The company has a strong sense of creating shareholders’ value through sustainable and profitable growth, TIH’s management measures fundamental improvement, and value creation through a set of key performance indicators (KPI) such as revenue per employee, product support growth, return on capital employed, EPS and dividends per share growth, etc.

Finning International Inc. (FTT): FTT operates as a heavy equipment and engine rental company, with a few main lines of business consisting of product support, equipment rental, sale of used/new equipment and refuelling. The company has a presence in a variety of markets including Canada, the U.K. and Ireland, South America, and other international markets. FTT is also a disciplined operator. The company serves a variety of different industries such as construction, forestry, mining, pipeline, etc. FTT is also a disciplined operator with a heavy focus on creating shareholder value through operating metrics such as returns on invested capital, free cash flow, EBIT margin, etc.

Financial Performance:

In terms of valuation, TIH has always been trading at a premium relative to FTT due to the more consistent operating results over the years, as well as a decent track record of growing the business organically along with a history of growing dividends. While FTT has demonstrated some cyclicality in demand, FTT is also mindful of disciplined capital allocation by repurchasing shares and maintaining a solid financial position. TIH’s premium valuation that has persisted over many years makes sense, as investors are willing to pay up for quality. We think both companies are solid operators in the rental equipment industry. Both are trading at a fair valuation, for investors look for a cheap valuation, we think FTT is more attractive, but in terms of quality of execution and business fundamentals, we would go with TIH.

Financial Metrics and Forward Estimates:

The table below compares the financial metrics and stats between TIH and FTT. TIH is twice as large a company as FTT and is expected to grow sales slightly more than FTT next year. Both companies are forecasted to see a slight drawdown in EPS in 2024. TIH’s profitability is more attractive in terms of net margin gross margin and return on equity (ROE), while also employing less leverage compared to FTT.

Investment Outlook:

Both TIH and FTT are solid operators in this niche of the industrial sector. FTT presents an attractive alternative to TIH but at a smaller size and cheaper valuation. On a growth basis, both companies are quite in similar terms of outlook with expected growth in revenues of around 4% over the next few years for both. That said, the 10-year dividend growth at TIH is around 11%, while it is around 5% in the case of FTT.

Comparing TIH and FTT can be summarized by whether an investor places more importance on valuation and quality. FTT is cheaper compared to TIH, but things are cheap for a reason due to a weaker fundamental profile. Growth for both companies will be dependent on the industrial activities of the economy, but we would side with TIH as a more sustainable value creator over the long term.

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