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Topic: Value Stocks

Value Stocks: Finning International moves ahead with lower costs and high dividend

Finning

Lower commodity prices have depressed demand for Caterpillar dealer Finning International. But the company has cut costs effectively and actually gained in used-equipment sales in the most recent quarter. In the meantime, Finning’s quarterly dividend yields 3.8% and appears secure.

FINNING INTERNATIONAL INC. (Toronto symbol FTT; www.finning.com) sells and services Caterpillar-brand heavy equipment in Canada, South America and the U.K. Its main customers are in the oil, mining, forest-products and construction industries.

The company continues to cut costs as low commodity prices hurt equipment demand. Finning recently announced plans to eliminate about 500 jobs by mid-2016. That’s in addition to the 1,900 workers, or 13% of its global workforce, laid off last year.

Because of the moves, Finning has already reduced its annual expenses by $150 million, and expects higher savings this year.


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Meanwhile, the company lost $161 million, or $0.94 a share, in 2015. If you exclude writedowns and other unusual items, Finning earned $1.29 a share. In 2014, it earned $318 million, or $1.85 a share.

Overall revenue declined 10.5%, to $6.2 billion from $6.9 billion. Sales of new equipment fell 24.2%, rental-equipment revenue fell 18.2%, and product-support revenue declined 0.9%. However, used-equipment sales gained 25.8%.

Value Stocks: Earnings due to improve in 2016

Finning’s sound balance sheet will help it cope while it waits for commodity prices to recover.

Its long-term-debt of $1.5 billion (as of December 31, 2015) is a high 47% of its currently depressed market cap. However, it doesn’t have to start repaying most of these loans until after 2020. It also held cash of $475.0 million, or $2.83 a share.

Finning’s earnings in 2016 will likely improve to $1.30 a share, and the stock trades at a reasonable 14.6 times that estimate.

Moreover, Finning continues to pay quarterly dividends of $0.1825 a share, for an annualized yield of 3.8%. In 2015, those payments accounted for a moderate 38% of its $325 million free cash flow (cash flow less capital expenditures). The current payout seems sustainable.

Recommendation in The Successful Investor: BUY

For our advice on uncovering the most promising value stocks, read How to identify the most undervalued stocks to invest in.

For our recent report on a leading Canadian value stock, read Revenue jumps for Calian Technologies.

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