FINNING INTERNATIONAL INC. $31 (Toronto symbol FTT; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 172.1 million; Market cap: $5.3 billion; Price-to-sales ratio: 0.8; Dividend yield: 2.0%; TSINetwork Rating: Above Average; www.finning.com) is the world’s largest dealer of tractors, bulldozers and trucks made by Caterpillar Inc. (New York symbol CAT). It also sells equipment made by other firms.
The company sells these products to customers in the mining, forest products and construction industries in Western Canada (50% of revenue, 47% of earnings), South America (37%, 45%) and the U.K. (13%, 8%).
Finning’s revenue rose 50.8%, from $4.5 billion in 2009 to $6.7 billion in 2013. That’s largely because prices for commodi- ties, like oil and coal, rebounded strongly after the recession, spurring heavy equipment demand.
Earnings jumped 115.4%, from $156.7 million in 2009 to $337.6 million in 2012. Because of more shares outstanding, earnings per share gained 113.0%, from $0.92 to $1.96. In 2013, Finning’s earnings fell 0.7%, to $335.3 million, or $1.94. But if you adjust for a change in accounting policy, its earnings rose 2.6%, while earnings per share increased 2.1%.
The company continues to add to its rental and maintenance operations. In May 2012, it acquired distribution and support businesses in South America and the U.K. from Bucyrus International, a maker of equipment for mining firms and oil sands developers.
Building a broader-based company
In October 2012, Finning added Bucyrus’s Canadian operations. It paid a total of $459.7 million for these businesses. Thanks to the Bucyrus purchase, Finning now gets 53% of its revenue by fixing and renting equipment. Sales of new gear account for 43%, while used equipment sales supply the other 4%.
In 2013, product-support revenue rose 11.7%, while new-equipment sales fell 5.5%. That’s because uncertain resource prices prompted many of Finning’s mining clients to refurbish their existing gear instead of buying new. Rental revenue rose 3.2%, while sales of used equipment rose 2.7%.
Finning’s Canadian revenue rose 2.4% during the year, while gross earnings jumped 11.9%. The gains resulted from more maintenance and repair work on shovels and drills. In addition, Finning recently opened a $110-million maintenance facility in Fort McKay, Alberta. That has helped it profit from the start-up of new oil sands projects.
Meanwhile, revenue at the company’s South American operations rose 4.9% in 2013, mainly due to the positive impact of currency exchange rates. On a constant-currency basis, revenue gained 2%, as Chilean miners bought more of Finning’s support services. Earnings rose 6.5%.
In the U.K., a drop in coal mining activity hurt new-equipment sales, which offset a 4% rise in product-support revenue. As a result, the U.K. division’s revenue fell 1.9% (or 4% on a constantcurrency basis), while earnings declined 3.2%.
Squeezing more out of its assets
Finning is also fueling its profits by optimizing its supply chain. For example, its B.C. branch now imports parts from Caterpillar’s warehouse in Washington State instead of a plant in Illinois. That has cut delivery times to 12 hours from 7 days.
The company is also installing a company-wide computer system to better manage its inventories and avoid shortages. At the same time, Finning is doing a good job of cutting its exposure to the highly volatile mining industry. These customers now account for 34% of its new equipment sales, down from 43% in 2008. Sales of construction equipment rose to 32% of the total from 27%.
Demand for construction equipment should continue to improve, mainly due to several big infrastructure projects in Western Canada, including expansions at the Calgary airport and port facilities in Vancouver. New liquefied natural gas terminals on the B.C. coast—and their connecting gas pipelines—should also spur Finning’s growth.
The Bucyrus purchase nearly doubled the company’s long-term debt. At the end of 2013, it stood at $1.4 billion, which is still a manageable 26% of Finning’s market cap. As well, most of its debt doesn’t have to be repaid until after 2018. The company also ended the year with cash of $176.3 million, or $1.03 a share.
The stock has responded strongly to Finning’s improving prospects, rising from $20 in August 2013 to its recent peak of $32 in March 2014. Even so, it trades at a moderate 14.2 times the $2.18 a share that Finning will probably earn in 2014.
Dividend hike seems likely this year
The higher earnings are giving Finning more room to raise its dividend. The current rate of $0.61 a share yields 2.0%. In 2013, dividends accounted for 31.3% of the company’s earnings, well within its target range of 25% to 35%.
Finning is a buy.
