Finning International Inc. saw its revenue take a hit across almost most business lines. One, however, experienced a 46.3% gain as oil producers and mining outfits trimmed their costs in the down market. That should help to protect cash flow and this mining stock’s dividend.
In general, stocks in the Resources & Commodities sector—as well as those in Manufacturing & Industry—expose you to above-average volatility. Those in either Finance or Utilities involve below average volatility. Consumer stocks fall in the middle.
A good way to cut your risk with Manufacturing and Industry stocks is to focus on market leaders like Finning. These well-established companies have built their strong reputations over decades. That makes it difficult for new competitors to take away their customers.
FINNING INTERNATIONAL INC. (Toronto symbol FTT; www.finning.com) sells and services Caterpillar-brand heavy equipment in Canada, South America and the U.K. Its main customers are in the oil, mining, forest-products and construction industries.
The company continues to cut costs as low commodity prices hurt equipment demand. It recently announced plans to eliminate about 525 jobs by mid-2016. That’s in addition to the 1,900 workers, or 13% of its global workforce, it laid off last year.
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Because of the moves, Finning has already reduced its annual expenses by $150 million, and expects higher savings this year.
Meanwhile, the company’s earnings in the three months ended March 31, 2016, fell 71.7%, to $15 million, or $0.09 a share. If you exclude writedowns and other unusual items, Finning earned $0.19 a share. A year earlier, it earned $53 million, or $0.31 a share.
Overall revenue declined 3.0%, to $1.49 billion from $1.54 billion. Sales of new equipment fell 6.7%, rental-equipment revenue dropped 21.1%, and product-support revenue declined 3.1%. However, used-equipment sales jumped 46.3%.
Mining Stocks: Long-term debt 38% of market cap
Finning’s sound balance sheet will help it weather the current downturn in commodity prices. Its long-term-debt of $1.5 billion (as of March 31, 2016) is a high 38% of its currently depressed market cap. However, it doesn’t have to start repaying most of that debt until after 2020. It also held cash of $425.0 million, or $2.53 a share.
Finning will likely earn $1.08 a share in 2016, and the stock trades at 21.3 times that estimate. That’s still a reasonable multiple in light of the company’s high market share and cost controls.
Moreover, Finning continues to pay quarterly dividends of $0.1825 a share, for an annualized yield of 3.2%. In the latest quarter, those payments totaled $31 million. That’s a high 103% of its $30 million free cash flow (cash flow less capital expenditures). However, Finning expects its free cash flow will total $300 million for all of 2016, so the current payout seems sustainable.
Recommendation in The Successful Investor: BUY
For our recent report on a mining stock that has stepped up its production, read Output boosts outlook for gold/silver miner.
For our view on how to make the most of mining stocks in all markets, read 20 tips for successful investing in mining stocks.
