Finning trades at a low valuation

In the wake of the COVID-19 pandemic, governments in Canada and elsewhere continue to invest in new public works projects such as roads, mass transit systems and hospitals. Those investments are fuelling strong orders for Finning as well as demand for its maintenance and repair services.

That’s why revenues and earnings grew strongly in the most recent quarter, and the shares represent real value at just 9.0 times the company’s 2024 earnings forecast. It’s a solid pick for 2024 and beyond.

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FINNING INTERNATIONAL INC. (Toronto symbol FTT; www.finning.com) sells and services Caterpillar-brand heavy equipment in Western Canada, South America, the U.K. and Ireland. Its main customers are in the oil and gas, mining, forestry products, and construction industries.

The company continues to benefit from the re-opening of the world’s economies and increased demand for its equipment and services. That helped offset the disruptions caused by the B.C. port strikes and wildfires, as well as high inflation and political uncertainty in Argentina.

Finning is also benefiting from a plan to expand its product support and maintenance operations, which now account for 56% of its total revenue.

Demand for new and used equipment also remains strong due to new mining and energy projects in Canada and South America. Moreover, government plans to increase the supply of housing units in Canada will also spur demand for its construction equipment.

Value Stocks: Product support and maintenance operations expand on rising demand for Finning

Finning’s revenue fell 20.7%, from $7.29 billion in 2019 to $5.77 billion in 2020 as COVID-19 hurt commodity prices and demand for its equipment. As the economy re-opened, revenue gained 16.1% to $6.70 billion in 2021, and rose a further 22.7% to $8.22 billion in 2022. Revenue rose another 16.2% to $9.54 billion in 2023 on strong demand for mining equipment in Canada and South America.

The lower revenue, due to the pandemic, cut Finning’s earnings by 4.1%, from $242 million in 2019 to $232 million in 2020; per-share earnings declined at a slower rate of 3.4%, from $1.48 to $1.43, on fewer shares outstanding. Earnings then shot up 57.3%, to $2.25 a share (or a total of $364 million) in 2021, and gained 44.4% to $3.25 a share (or $501 million) in 2022. The company’s earnings improved another 8.9% to $3.54 a share (or $521 million) in 2023. If you factor out unusual items, earnings per share jumped 20.3%, to $3.91 in 2023 from $3.25 in 2022.

For 2024, the company plans to invest between $290 million and $340 million in its businesses, up from $220 million in 2023. That higher spending will help Finning meet rising demand for its products as Canada’s oil sands producers increase their output to take advantage of the expanded TransMountain pipeline. New copper mines in Chile should also spur demand for its equipment.

In addition, the company expects slower growth in the U.K. following the completion of the first phase of a high-speed rail project. However, demand from U.K. power utilities and operators of datacentres remains strong. Finning also plans to cut its exposure to Argentina due to that country’s currency restrictions.

The company will probably earn $3.94 a share, and the stock trades at just 9.0 times that forecast. The $1.00 dividend yields 2.8%.

Recommendation in The Successful Investor: Finning Int’l Inc. is a buy.

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Jim Bates

Jim is an associate editor at TSI Network. He is the lead reporter and analyst for The Successful Investor and Wall Street Stock Forecaster and a member of the Investment Planning Committee. Jim has held the Chartered Financial Analyst designation since 1992 and spent more than a decade at the Financial Post DataGroup before joining TSI Network. He has a Bachelor of Commerce degree from the University of Toronto.

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