FINNING INTERNATIONAL INC. $45 (Toronto symbol FTT; Conservative Growth Portfolio, Manufacturing & Industry sector; SI Rating: Above average) sells and leases Caterpillar brand heavy equipment to oil exploration, mining and forestry firms. The company’s operations in Western Canada supply 40% of its revenue. It also operates in South America (Argentina, Bolivia, Chile, and Uruguay) and the UK.

In September 2006, Finning sold the materials handling operations of its UK division for $175 million. This business supplies forklifts and related machinery to warehouses and factories, and has struggled in the past few years. The company recorded a $32.7 million loss on the sale, but it should improve the long-term prospects of the remaining UK operations.

Finning used the cash from the sale to pay down debt. Although the company had to pay a special charge on the early retirement of certain bonds ($0.07 a share), the move will cut its future interest expenses. Finning’s long-term debt now stands at 0.5 times equity, down from 0.6 times at the start of 2006.

Thanks to high commodity prices, which have spurred strong demand for Finning’s equipment, income from continuing operations in the third quarter of 2006 rose 55.8%, to a record $0.81 a share (total $72.8 million) from $0.52 a share ($46.1 million) a year earlier. Revenue rose 5.2%, to $1.22 billion from $1.16 billion.

The company’s strong reputation is helping it win more orders. It recently received a $264 million multi-year contract to supply and service mining trucks to a major oil sands project. Finning is also in a good position to profit from several major construction projects related to the 2010 Winter Olympics in Vancouver.

Finning should earn $2.51 a share in 2006, and the stock trades at 17.9 times that figure. Earnings should reach $2.95 in 2007, which implies a p/e of 15.3. The stock is also cheap at 6.9 times its projected cash flow of $6.50 a share. The $0.64 dividend yields 1.4%.

Finning is a buy.