FINNING INTERNATIONAL INC. $11 - Toronto symbol FTT

FINNING INTERNATIONAL INC. $11 (Toronto symbol FTT; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 170.5 million; Market cap: $1.9 billion; Price-to-sales ratio: 0.3; SI Rating: Above Average) sells, rents and repairs heavy equipment made by Caterpillar Inc. It has major customers in the mining, forest products and construction industries. Finning’s revenue rose 5.8% in 2008, to $6 billion from $5.7 billion in 2007. Finning’s clients ordered more heavy equipment in the first half of the year as a result of high commodity prices. Finning’s operations in the U.K. and South America account for roughly 45% of its sales, and the drop in the Canadian dollar in the last quarter of 2008 increased the contribution from these divisions. Finning is responding to the global recession by cutting jobs. If you exclude costs related to this, and a writedown of goodwill, earnings fell 11.7%, to $247.4 million from $280.1 million. Earnings per share fell 7.7%, to $1.43 from $1.55 on fewer shares outstanding. Finning continues to expand its service business. This is more profitable than selling new machines. It should also help Finning weather the global recession, as resource companies will probably hold off on buying new equipment until commodity prices rise again. However, the cost of training new mechanics will weigh on Finning’s 2009 profit margins. The company’s $1.4-billion long-term debt is a high 74% of its market cap. However, it has few repayments due until 2011. This reduces the need to issue new shares or borrow more cash in today’s tight credit market. Finning also has $109.8 million, or $0.64 a share, in cash. Finning will probably earn $0.95 a share this year, and the stock trades at 11.6 times that amount. The company spent a reasonable 30% of its 2008 earnings as dividends, so the annual rate of $0.44 a share (which yields 4.0%) is probably safe for now. Finning is a buy.

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