FINNING INTERNATIONAL INC. $25 (Toronto symbol FTT; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 172.0 million; Market cap: $4.3 billion; Price-to-sales ratio: 0.7; Dividend yield: 2.4%; TSINetwork Rating: Above Average; www.finning.com) rents, sells and services heavy equipment made by U.S.-based Caterpillar Inc. (New York symbol CAT). Its main customers are in the oil, mining, forest products and construction industries.
Canada supplies 50% of Finning’s revenue, followed by South America (37%) and the U.K. (13%).
Lower prices for copper and other commodities have weakened equipment demand, particularly in South America and the U.K. However, Canadian sales remain strong. Weak commodity prices are also prompting Finning’s customers to rent more equipment and buy used machinery. As well, they are spending more to make their current gear last longer.
As a result, Finning’s overall sales rose 11.7% in the three months ended September 30, 2013, to $1.8 billion from $1.6 billion a year earlier. Sales of new equipment (which account for 44% of its total sales) rose 7.5%; rental revenue (6%) rose 8.1%; and sales of used gear (5%) jumped 44.9%.
Sales of maintenance and support services (45%) rose 13.5%. Half of that gain is from assets Finning bought from Bucyrus International, a maker of mining and oil sands equipment. In May 2012, Finning purchased Bucyrus’s distribution and support businesses in South America and the U.K. for $305.8 million U.S. In October 2012, Finning added Bucyrus’s Canadian business for $159.2 million.
Earnings rose 6.2%, to $86.2 million, or $0.50 a share, from $81.2 million, or $0.47, a year earlier.
As of September 30, 2013, Finning’s order backlog was $1.0 billion, down from $1.1 billion three months earlier.
The company completed some large orders during the quarter, but orders for new equipment rose 11% thanks to strong demand from clients outside the mining industry.
The company’s balance sheet is sound: its long-term debt of $1.35 billion is a manageable 31% of its market cap, and it holds cash of $83.1 million, or $0.48 a share.
The stock is up 22.7% from its low of $20.37 in August 2013. It now trades at 12.8 times Finning’s projected 2013 earnings of $1.96 a share. The $0.61 dividend yields 2.4%.
Finning is a buy.
