A diversified industrial company, TerraVest (TSX:TVK) is valued at a market cap of $470 million. It is involved in the manufacturing of home heating products, energy processing equipment, fiberglass storage tanks, propane, as well as natural gas liquids transport vehicles and storage vessels.
Its operating segments include fuel containment, service, and processing equipment. The fuel containment business manufactures bulk liquefied petroleum gas transport trailers, delivery & service trucks, storage tanks, dispensers, and tanks. Moreover, the processing equipment business manufactures equipment for upstream and midstream oil and gas processing, transportation, mining, and agriculture.
In the last 10 years, TVK stock has returned 1,230% to shareholders after adjusting for its dividends. Comparatively, the TSX and S&P 500 indices have surged 128% and 226%, respectively, since February 2013.
While TerraVest stock has crushed broader market returns in recent years, let’s see if it remains a viable long-term bet at the current price.
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Is TerraVest stock a buy or sell right now?
TerraVest has increased its sales from $306 million in fiscal 2019 to $576 million in fiscal 2022 (ended in September). Its operating income has surged from $37 million to $51 million in this period, indicating an operating margin of around 9%.
The company reported stellar results in the December quarter as well. Its revenue in the fiscal first quarter (Q1) of 2023 stood at $177.19 million compared to $131.36 million in the year-ago period, indicating an increase of 35%. The uptick in revenue was due to TerraVest’s acquisitions of Mississippi Tank and Manufacturing Company and T.S.X. Transport, which were completed in 2022. If we exclude the acquisitions, TerraVest increased sales by 10% in Q1.
The company confirmed its top line was driven higher by higher demand for home heating equipment, LPG and NGL storage and distribution equipment, and oil and gas processing equipment in Western Canada.
Its net income also grew 24% year over year to $13 million, up from $10.5 million in the prior-year period. The increase in profit margins was offset by higher financing costs and interest rate hikes. The company also increased its balance sheet debt to support inorganic growth and working capital requirements, resulting in higher interest payments.
Its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) stood at $30.23 million in Q1 — an increase of 49%.
What’s next for TVK stock price and investors?
TVK ended Q1 with an operating cash flow of $21.8 million compared to a cash outflow of $337 million in the prior-year quarter. The increase in cash flows was driven by rising net income and stabilization of working capital.
The company increased growth capital expenditure by more than 20% to almost $7 million to expand its rental fleet and automate certain manufacturing processes. These projects should result in higher cash flows for TerraVest in fiscal 2023.
TerraVest also pays investors an annual dividend of $0.50 per share, indicating a forward yield of 1.9%. The company has enough room to increase these payouts, lower debt, and reinvest in capital expenditures, as its payout ratio stands at just 9%, which is even lower than the year-ago ratio of 14%.
TerraVest has, however, explained the current business environment remains challenging due to supply chain disruptions, cost inflation, and labour shortages. But it continues to make investments to improve manufacturing efficiency, add complementary product lines, as well pursue highly accretive acquisitions.
TerraVest remains a safe bet, given its reasonable valuation, robust cash flows, and rapid earnings growth.
