Monday, April 16, 2012

Toromont Industries Ltd

I own this stock (TSX-TIH). I first bought this stock in 2007 and then some more in 2008. My total return, if I exclude Enerflex is 9% per year. With Enerflex included my return is 7.4% per year. The problem with Enerflex is that Toromont did not have it for very long. Basically, I treating the money I got from it as a special dividend payment.

Looking at the 9% return this breaks down into a return of 13.5% per year return on dividends and a 4.5% loss in capital gains. I sold Enerflex after I received the shares and sold this stock at a loss. The stock first tracked up and then down after it was spun-off. It was had headed a bit higher when I sold. It was not a stock I wanted to hold, so I thought I would get out while I could get a reasonable price for it.

The return on this stock is only decent over the past 5 years because of the special dividend of the Enerflex spin-off. I think that the net result of Toromont buying and then spinning Enerflex off is a loss for its shareholders. However, most people feel more confused about it then thinking it was a negative move. There is an article about this at Daily Buy Sell Advisor.

According to my spreadsheet, if you had held this stock over the past 5 and 10 years, you would have earned 8.7% and 14.9% per year return, respectively. The portion accorded to dividends would be 11.5% and 7.3% per year. Going forward, dividend portion of your return will be closer 2% per year.

Looking at growth, the dividends have grown at the rate of 5.8% and 12% over the past 5 and 10 years to the end of 2011. The dividend growth to date would be lower at 3.7% and 10.9% per year over the past 5 and 10 years. The lower to date one is because dividends were decreased following spin-off of Enerflex. However, they have since increased dividends by 9.1%.

Growth in revenue, earnings, cash flow and book value is rather low or non-existent. For example the growth in EPS is negative (3% per year) over the past 5 years and over the past 10 years is 6.5% per year. The growth in cash flow per share is 0% per year and 2.3% per year over the past 5 and 10 years.

The book value declined by 66% in 2011 due to the spin-off the Enerflex. Over the past 5 years book value has declined 9.7% per year. Over the past 10 years book value has grown by 0% per year. This has all to do with the purchase and spin-off of Enerflex. The spin-off value was less than the purchase value.

This big decline in book value has distorted the Return on Equity. Because book value is now so low and net income was quite good, the ROE is showing at an impossible 61%. ROE based on Comprehensive Income is worse at 63%. (The ROE for 2011 is useless and it tells us nothing.)

The only good thing is the debt ratios. The current Liquidity Ratio is very good at 1.74. The current Debt Ratio is also good at 1.79. The current Leverage and Debt/Equity Ratios are ok at 2.26 and 1.26.

I still have hope for this stock. It is an Industrial stock so I expect long term returns to be about 8%, with 2% from dividends and 6% from capital gains. The total return is not far off this when I include Enerflex and get a return of 7.4%. I think it would have done better without buying and selling Enerflex. Also the Industrials have not really recovered from the latest recession. I still think that this company still has potential.

I thought a lot about how to update my spreadsheet because of the Enerflex Ltd (TSX-EFX) spin-off. I have come to the conclusion that as a shareholder of Toromont, I only got a cash equivalent to the share price of Enerflex on the date of separation. That date was June 3rd, 2011. Enerflex was worth $12.65 per share on that day. Unfortunately, the stock went up a bit and then tracked lower for a while. I sold Enerflex at a loss.

There are two sections to this company. The Equipment Group is for Caterpillar dealerships. The Compression Group designs, engineers, fabricates and installs compression systems for natural gas, fuel gas and carbon dioxide. This last group also has industrial and recreational refrigeration systems. Its web site is here Husky. See my spreadsheet at tih.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

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