You have 2 free articles remaining. Subscribe
Apr 23, 2018

The Rear-View Mirror Is Worth Looking Into Past results are no guarantee of future returns, but what else have you got?

by Richard Morrison

Richard MorrisonAs a business journalist in the mid-1990s, I had the privilege of interviewing Sir John Templeton, founder of the Templeton Growth Fund and arguably the best stock-picker of the twentieth century. During one of his Toronto rallies, he spoke out against the boilerplate commentary that had to be written into mutual fund prospectuses, namely, that past returns are no guarantee of future results. Forecasting the future performance of any investment is, of course, difficult, he said, but it would be even harder if you regarded past returns as having no value.

“What else have you got?” Mr. Templeton asked the crowd rhetorically.

All four companies mentioned here have delivered solid returns to shareholders over the past few years, representing slow, steady growth. These are not companies that have suddenly benefited from positive publicity surrounding a valuable mineral find, legalized marijuana, cryptocurrencies, alternative energy or wonder drugs; they’re merely established businesses that have recorded steady increases in sales, earnings and dividends. Their past performance is no guarantee of future returns, but I wouldn’t bet against them.

BRP Inc.

BRP Inc. (DOO/TSX), spun-off from Bombardier Inc. in 2013, makes Ski-Doo and Lynx snowmobiles, Sea-Doo jet skis, Can-Am and Spyder off-road vehicles and Evinrude boat motors, and Rotax engines for boats, go-karts, motorcycles and recreational aircraft. The company’s annual sales are about $4.2 billion, mostly from the United States. BRP employs about 8,700 people worldwide.

BRP shareholders suffered between 2013 and 2016, but since then things have turned around and revenue, net income and earnings per share have all climbed steadily. The company has been signing up more dealers, moving more production to low-wage countries and improving the technology in its products.

At a current price of about $45, BRP has a market capitalization (shares times share price) of $4.85 billion and trades at about 17 times earnings of $2.70 per share. Last summer, the company bought back shares in a Dutch auction and introduced a 32c per share annual dividend that yields about 0.7%, strategies that should support the share price.

The company can continue to grow by making prudent acquisitions and expanding into Russia and China. BRP aims to have $6 billion in sales and $3.50 in earnings per share by 2020—goals that, if attained, would suggest a three-year target price of $59.50.

BRP’s closely-held multiple-vote shares are owned largely by Baudier Group and Bain Capital. The dual-class share structure is a drawback for investors, yet management certainly knows what it’s doing, having guided BRP to an impressive Return on Invested Capital (ROIC) of more than 30% for the past three years.

BRP has a rare “strong buy” recommendation from the Centre for Financial Research and Analysis (CFRA). Founded in 1994, CFRA is an independent research firm that allocates only 10% of its recommendations as strong buys. A February 16, 2018, CFRA quantitative report on the BMO Investorline site says BRP’s overall score put it in the third percentile of all the stocks in CFRA’s model universe, with 1 being the best and 100 the worst.

Toromont Industries (TIH)

Concord, Ont.-based Toromont has two business segments. The company’s equipment unit owns a network of Caterpillar heavy-equipment dealerships, machinery and equipment used in construction, mining, power systems, farming and material handling. Toromont’s CIMCO unit designs builds and sells industrial and recreational refrigeration systems.

Toromont has paid dividends every year since 1968. The most recent dividend increase, announced February 22, 2018, raised the dividend to 23c per quarter, up 21%, and marked the 29th consecutive year of increases—perhaps the single most reliable indicator of consistent, long-term management performance.

Last summer, Toromont announced it would pay $1.02 billion for the Hewitt Group of companies, the company’s largest-ever acquisition, making Toromont the authorized Caterpillar dealer for Quebec, Western Labrador and the Maritimes; the Caterpillar lift truck dealer for Quebec and most of Ontario and the MaK engine dealer for Quebec, the Maritimes and the eastern U.S. Seaboard. The announcement caused Toromont’s shares to jump more than 20% to nearly $55 from $45, and the share price has held near there since then. Toromont’s recent price of more than $57 means the shares trade at 26 times earnings and the 92c annual dividend yields just 1.6%, despite the latest increase.

In 2017, Toromont earned $176 million ($2.22 per share) on revenue of $2.35 billion. Revenue was up 23% over the previous year, while net earnings were up 13% and earnings per share were 12% ahead. Toromont’s management says the company aims for an 18% return on shareholders’ equity, which it surpassed in 2017 with a 19.3% Return on Equity (ROE). Leverage, as represented by the net debt to total capitalization ratio, was 40% at year-end.

Toromont’s revenue, net income and earnings per share have increased every year since 2011. Toromont’s share price has climbed steadily, delivering a total return of 20.6% over the past five years, with a beta of 0.92 (a measure of volatility in which the S&P/TSX Composite is 1.0). An investor who put $10,000 into Toromont five years ago would have about $27,000 today.

By comparison, larger competitor Finning International Inc. (FTT/TSX) saw its revenue slip in 2015 and 2016, and the company recorded a loss of $161 million or -94c per share in 2015, before rebounding. Finning’s shareholders have enjoyed a total return of just 8.3% over the past five years and have suffered through more volatility (a beta of 1.81). A $10,000 investment in Finning would be worth only about $15,000 today.

Smaller competitor Wajax Corp. has also lagged Toromont, as Wajax’s revenue slipped in 2015 and 2016, and net income fell in 2013 and 2014, finally culminating in an $11 million loss (-59c per share) in 2015 and only a slight rebound since then. Wajax shareholders have had to endure a total return of minus 6.5% over the past five years, as a $10,000 investment in the company’s shares would be worth less than $7,000 today.

Spin Master Toys (TOY/TSX)

Spin Master, based in Toronto, creates, manufactures and sells an assortment of toys, games, and entertainment properties in more than 60 countries. Spin Master’s brands include Zoomer, Bakugan, Meccano, Hatchimals, Air Hogs and PAW Patrol. The company has also produced a variety of children's television series such as PAW Patrol and Little Charmers, which effectively promote its products. The company has a network of inventors who contribute ideas for new toys, which are largely made in China and Mexico. Spin Master gets about two-thirds of its sales from North America, but management plans to diversify its markets by launching more products internationally.

Spin Master shareholders have enjoyed steady price appreciation as the shares have tripled over the past five years, as sales, net income and earnings per share have all grown steadily. At a current price of about $55, Spin Master has a market capitalization of about $5.6 billion, and the shares trade at about 24 times estimated earnings per share.

CCL Industries Inc. (CCL.B/TSX)

Packaging and label maker CCL, headquartered in Toronto, has about 20,000 employees working in 167 plants in 39 countries, producing labels, containers and printable media products for customers in the packaging, healthcare, automotive and consumer durable markets.

A $10,000 investment made in CCL shares is worth more than $60,000 today, and its shareholders have enjoyed a total annual compounded return of more than 40%.

The company split its shares five for one last May. Over the past year the share price has fluctuated between $55 and $65, but viewed over a longer period, CCL’s shares are a clear outperformer. At a recent share price of about $64, CCL shares trade at about 24 times earnings and the annual dividend of 52c yields just 0.8%. The company has increased its dividend every year since 2004.

Like its dividend, CCL’s sales, net income and earnings per share have climbed steadily every year since 2010. Last year, CCL earned $474.1 million ($2.66 per share) on sales of $4.76 billion.

Sometimes you can find reasonably good, index-beating investments just by looking at a five-year price chart. A relatively smooth line that moves from the lower left to the upper right without any dramatic plunges points to a well-managed company, especially if total returns have been bolstered by consistent dividend increases. Of course, past performance is no guarantee of future returns, and the smooth line never looks as smooth over the short term. Looking in the rear-view mirror, however, at least helps you determine if management has been able to keep the car on the road.

Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post. richarddmorrison@yahoo.ca