Upgrade Scotia Capital analyst Michael Doumet thinks been a long time since the backdrop from TSX-listed equipment dealers has “been this good.”
Seeing them benefiting from “favorable demand trends, lean inventories, and strong pricing,” he thinks Finning International Inc.,
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Toromont Industries Ltd. and Wajax Corp. are all set up for upside earnings surprises in the first quarter.
“Unlike several other industrial sub-sectors, the dealers should be net beneficiaries of supply chain tightness (i.e., pricing) and inflationary pressures (i.e., a benefit to its mining customers),” he said. “The non-res construction, mining, and oil & gas cycle also look increasingly favorable. For 1Q22, our EPS forecast is above consensus for each FTT (11 per cent), TIH (9 per cent), and WJX (2 per cent). In terms of share price performance, FTT is leading the pack, up 23 per cent year-to-date, although we would argue it is still being valued “cautiously” as its multiple does not reflect an extended cycle. The main opportunity with FTT shares, in our view, is that in addition to positive surprises, a positive re-rate fuels more gains. WJX shares lagged following its 4Q21 miss, but we expect a strong sequential earnings rebound in 1Q22. In the middle, but more recently outperforming, TIH brings a combination of quality and M&A optionality.”
For Finning, he’s raised his target by $1 to $46, above the $44.78 average, with a “sector outperform” rating.
“With FTT executing on margins (it beat expectations in the last three quarters) in what increasingly looks to be shaping up as a multi-year cycle, we believe investors are (still) being too cautious on how they value the shares,” the analyst said. “Macro-wise, 2022 may be as good as it’s been for FTT since 2012-2014. We forecast product support growth of 10 per cent in 2022 (highest since 2013) on higher mining and construction activity (and share gains). In the oil sands, we expect more spend as customers shift their focus to fleet uptime from cost containment. On a consolidated basis, its product support growth accelerated from down 5 per cent year-over-year in 1Q21 to up 12 per cent year-over-year in 4Q21 – and we think mining and energy markets will sustain the favorable momentum into 2022. Demand for equipment should continue to outstrip supply. As FTT is well positioned with its inventories (best of the dealers, in our view), we expect the dynamic to remain a net positive (i.e., favorable margin implications).”