Today we look at a Canadian value stock that is preparing for a rebound. Finning International, the world’s biggest dealer of Caterpillar heavy machinery, is taking a two-pronged approach to counteracting lower demand from many of its clients. On the one hand, it is cutting costs by reducing its workforce. On the other, it is taking advantage of lower commodity prices to make acquisitions. While the company’s earnings are expected to be lower in 2016, its balance sheet is sound and its dividend, which appears secure, yields 3.8%. 

FINNING INTERNATIONAL INC. (Toronto symbol FTT; www.finning.com) started up in 1933 and is now the world’s largest dealer of tractors, bulldozers and trucks made by Caterpillar Inc. (New York symbol CAT). It also sells heavy equipment made by other firms. Finning’s clients are mainly in the mining, forest products and construction industries.

Western Canada (B.C., Alberta, Yukon, Northwest Territories and parts of Nunavut) supplied 53% of Finning’s revenue in 2014, followed by South America (Argentina, Chile, Uruguay and Bolivia), which contributed 32%, and the U.K. and Ireland (15%).

In the past few years, Finning has expanded its repair and rental businesses, which are more profitable than selling new equipment. In 2012, it acquired Bucyrus’s distribution and support businesses in Canada, South America and the U.K. (Bucyrus makes gear for mining and the oil sands.)

Finning now gets 49% of its revenue by fixing equipment. Sales of new gear account for 42%, rentals provide 5% and used equipment sales supply the remaining 4%.

Thanks to the Bucyrus deal and smaller acquisitions, Finning’s revenue rose 60.2%, from $2.3 billion in 2010 to $3.6 billion in 2014. Earnings jumped 90.2%, from $1.02 a share (or a total of$176 million) in 2010 to $1.94 a share (or $335million) in 2013. Earnings then fell to $1.84 a share (or $318 million) in 2014, but if you exclude unusual items, Finning earned $1.96 a share last year, down 1.0% from $1.98 in 2013.

Value stocks: Low commodity prices open door to more acquisitions for Finning

Many of Finning’s clients have cut spending on exploration and other projects in response to low prices for oil, copper and other commodities. In response, the company is cutting 10% of its workforce in Canada and South America, which are more sensitive to commodity prices than the U.K. It also closed underused facilities.

Meantime, Finning is taking advantage of low commodity prices to make more acquisitions. For example, it recently paid $240 million for Kramer Ltd., which distributes Caterpillar equipment in Saskatchewan. Kramer will increase Finning’s yearly revenue by $275 million, and give it clients in new markets such as potash and uranium mining.

Finning’s balance sheet is sound: as of June 30, 2015, its long-term debt was $1.5 billion, or a manageable 39% of its market cap. It also held cash of $244.5 million, or $1.43 a share.

Low commodity prices will probably cut Finning’s 2015 earnings to $1.62 a share, and the stock trades at a moderate 13.6 times that estimate. The $0.73 dividend yields 3.3%.

Recommendation in The Successful Investor: BUY.