TIH: Mixed Rating Shifts And Buyback Activity Will Influence Near-Term Market Position

Key Takeaways

• Expansion into data center infrastructure, electrification, and sustainable solutions positions Toromont for new revenue streams and future margin growth across North America.
  
• Emphasis on service, rental, and backlog strength provides recurring, stable revenue with improved visibility and resilience against economic cycles.
  
• Exposure to market volatility, cost inflation, supplier reliance, over-investment risks, and labor shortages threaten sustainable revenue growth, margins, and operational resilience.

Catalysts

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

• The rapid ramp-up of AVL's production capacity, ongoing integration, and accelerated facility expansion in the U.S. positions Toromont to capitalize on booming North American data center infrastructure investment, laying the foundation for sizable future revenue and margin growth as AVL transitions from near-term non-cash acquisition charges to accretive earnings.
  
• Toromont's robust backlog-driven by strong order intake in construction, power systems, and data center enclosures-combined with planned production scaling, underpins mid-term visibility for revenue growth, with a significant share of the backlog to be delivered within the next 12 months.
  
• Growing focus and hiring in aftermarket service, including technician expansion and improved telematics/data analytics with customers, is expected to increase recurring product support revenue and lift net margins over time, as the installed equipment base ages and enters higher-margin maintenance and replacement cycles.
  
• The trend towards equipment rental (as opposed to ownership) is driving rental fleet expansion and improved utilization, fueling a more stable, recurring revenue stream and partially offsetting cyclical swings in equipment sales; this supports gross margin stability and underpins long-term earnings quality.
  
• Enhanced participation in electrification, clean power, and sustainable infrastructure-including power systems for data centers and increased demand from stricter environmental standards-creates new revenue streams and potential for margin expansion as Toromont delivers next-generation, higher-value solutions across its expanded geographic footprint.

Toromont Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Toromont Industries's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.5% today to 10.7% in 3 years time.
• Analysts expect earnings to reach CA$626.8 million (and earnings per share of CA$7.41) by about September 2028, up from CA$486.0 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 22.6x on those 2028 earnings, down from 23.9x today. This future PE is greater than the current PE for the CA Trade Distributors industry at 14.4x.
• Analysts expect the number of shares outstanding to decline by 0.91% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.14%, as per the Simply Wall St company report.

Toromont Industries Future Earnings Per Share Growth

Risks

• Macroeconomic and trade uncertainty, including cautious customer purchasing, persistent inflation, evolving trade negotiations between Canada and the U.S., and variability in commodity cycles, creates risks to top-line revenue growth and order intake, as seen in "choppy" market demand, lower mining equipment sales, and stagnant or slow construction activity. This could heighten volatility and potentially reduce long-term revenue growth.
  
• Margin pressures from persistent cost inflation (wages, parts, logistics), rising interest expense, and ongoing increases in selling and administrative costs-exacerbated by ramp-up and integration expenses from acquisitions (e.g., AVL)-have led to a year-over-year decline in operating income and operating margin (from 12% to 10.9% ytd), threatening sustainable profit expansion and net margins.
  
• Overreliance on Caterpillar as a principal partner-emphasized by AVL and core Equipment Group business-creates supplier concentration risk; any shift in exclusivity, direct sales by OEMs, or OEM digital initiatives could materially impact Toromont's market access, competitive positioning, and future revenue streams.
  
• Escalating capacity build-out for AVL, especially targeting the U.S. data center market, raises the risk of over-investment if data center enclosure supply exceeds demand or if technological shifts outpace Toromont's adaptation, potentially compressing margins and leaving the company exposed to underutilized assets and weaker earnings.
  
• Labor shortages and aging workforce, signaled by ongoing technician hiring requirements, retirements, and the focus on skills recruitment, could constrain Toromont's ability to scale aftermarket services and support, risking delays in delivery, service quality erosion, and bottlenecks in high-margin recurring revenue streams.

Valuation

• The analysts have a consensus price target of CA$146.111 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$160.0, and the most bearish reporting a price target of just CA$125.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$5.9 billion, earnings will come to CA$626.8 million, and it would be trading on a PE ratio of 22.6x, assuming you use a discount rate of 7.1%.
• Given the current share price of CA$142.74, the analyst price target of CA$146.11 is 2.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.