FINNING INTERNATIONAL INC. $23 (Toronto symbol FTT; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 171.9 million; Market cap: $4.0 billion; Price-to-sales ratio: 0.6; Dividend yield: 2.4%; TSINetwork Rating: Above Average; www.finning.com) is the world’s largest seller of heavy equipment, such as tractors, bulldozers and trucks, made byCaterpillar Inc. (New York symbol CAT). It sells these products to customers in the mining, forest products and construction industries in western Canada (53% of total revenue), South America (33%) and the U.K. (14%).
Finning also rents and fixes equipment. These services—which are more profitable than selling this gear—now supply half of the company’s sales.
Rising resource prices boosted results
The company’s revenue fell 20.9%, from $5.7 billion in 2007 to $4.5 billion in 2009. That’s largely because it sold some of its U.K. operations. However, higher prices for commodities, like oil and coal, spurred heavy equipment demand and pushed up Finning’s revenue to $4.6 billion in 2010, and to $5.9 billion in 2011.
Earnings fell 44.1%, from $280.1 million in 2007 to $156.7 million in 2009. Because of fewer shares outstanding, earnings per share declined 40.6%, from $1.55 to $0.92. However, earnings turned around in 2010 and climbed to $1.06 a share (or atotal of $181.1 million). Finning’s earnings rose 42.5% in 2011, to $1.51 a share (or $259.4 million). Without one-time items, per-share earnings jumped54.3%, from $1.27 in 2010 to $1.96 in 2011.
The company also uses acquisitions to spur its growth. For example, it recently bought Bucyrus International’s distribution and support businesses in Canada, South America and the U.K. Bucyrus makes equipment that is used for mining and in the development of the oil sands.
Latest purchase looks like a great fit
Finning paid $465 million U.S. for the Bucyrus operations. That’s equal to 12% of its market cap. However, these new businesses should increase the company’s 2012 revenue by 12% to 15%. The purchase should also push up Finning’s earnings to $2.35 a share in 2013. The stock trades at just 9.8 times that forecast.
The company had to borrow the cash it needed to buy the Bucyrus operations. As a result, its long-term debt rose to $1.1 billion as of September 30, 2012, from $762.6 million at the end of 2011.Even so, that’s still a manageable 28% of Finning’s market cap. The company also holds cash of $135.8 million, or $0.79 a share.
Ready to profit from new pipelines
Finning’s exposure to the highly cyclical resource industry is a risk factor. As well, oil sands developers are scaling back their expansion plans.
However, the construction of new pipelines should spur oil sands projects, as well as demand for Finning’s products. That should also give the company more room to increase its dividend. The current annual rate of $0.56 yields 2.4%.
Finning is a buy.
