Finning – Not concerned but not excited either

Finning International is the world’s largest Caterpillar dealer, selling, renting, and providing parts and services for equipment and engines.

The company operates in three geographies – Canada (54% of revenue), UK & Ireland (16%), and South America (30%). It operates a large network of product support services across British Columbia, Yukon, Alberta, Saskatchewan, the Northwest Territories, and a portion of Nunavut.

Finning has been around for the last 85 years and caters to a wide range of customers in various industries such as mining, construction, petroleum, forestry, and power systems.

Unmatched service capabilities and a widespread product support infrastructure has helped the company develop a loyal customer base over the years.

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Revenue Growth & Market Exposure

Product support accounts for a lion’s share of Finning’s revenues (52%), followed by new equipment (38%), used equipment (5%), rental (3%), and fuel and other (2%).

Finning has a deep diversification across geographies, customers, and industries. The company should benefit from strong end-market demand in Chile, Canada, and the U.K.

Finning is directing its capital expenditure towards process and technology improvements, ultra-class mining vehicles, and digital and e-commerce capabilities.

The company has been successful in increasing its share of the total addressable opportunities in online parts and connected assets markets, through continuous investments in equipment connectivity and digital commerce.

Finning is investing strongly in digital initiatives which have helped it improve key performance metrics significantly. The company has made significant improvements in digital sales which have been increasing over the years. Finning is also improving its supply chain dynamics which should result in better capital efficiencies.

Finning’s Q3 revenue declined by 21% YoY, as a result of reduced market activity in Canada and South America. Finning is, however, witnessing improvement in its rental and product support markets as customers resume work and machine utilization hours increased.

Earthmoving work on the High-Speed Rail 2 mega-project, which represents a significant opportunity for Finning, is expected to begin later this year. Increasing copper production and government stimulus spending should support large infrastructure projects.

Finning stands a good chance to gain from its relatively stable backlog of $700 million. Solid equipment demand and product support across all sectors, strong order intake and backlog should drive top-line growth in the long term.

The company is focusing on growing product support revenue through the market recovery by strengthening relationships with customers and leveraging technology.

Dividends

Finning is one of the best dividend-growth stocks in the market today, having raised its dividend for the 18th consecutive year in 2019. This Dividend Aristocrat has grown its dividends at more than 6% CAGR over the last decade.

Finning last raised its dividend by 2.5% and paid a quarterly dividend of $0.205 per share. It did not increase its annual payout this year. The company sports an annual attractive yield of 4% and has a payout ratio of 67%.

Finning has been returning cash to shareholders through a combination of dividends and share buybacks. The company did not repurchase any shares in the second and third quarters of FY 2020 but bought back shares worth $23 million in the first three months of the year.

It renewed its NCIB for one more year effective May 11, 2020. Despite the economic slowdown, Finning generated a free cash flow of $316 million in the third quarter. The company will minimize its capital expenditures and focus on mission-critical maintenance, information technology systems, and a few rental fleet additions. Its 2020 net capital expenditure is expected to be in the range of $90-$140 million.

Being the largest Caterpillar dealer globally, Finning is in a good position to take advantage of Caterpillar’s stellar reputation in the market across industries and geographies. Every Cat machine is backed by its Global Dealer Network, which is acclaimed for providing parts, service, and equipment worldwide.

Caterpillar is the world’s leading manufacturer of construction and mining equipment. It is the preferred brand for professionals across industries and is known for its industry-leading performance and superior quality.

Finning is favorably placed to benefit from its expertise and insight, and the reputation of being a trusted partner. The company’s focus on customer-centric growth strategy, a reduced cost structure, and sustainable operating improvements are expected to generate earnings growth as demand increases.

Higher profitability and capital discipline are consistent with the company’s commitment to growing ROIC.

Competition

Finning enjoys an edge over its competition given its superior technology and a large portfolio of autonomous solutions. The company operates in very competitive equipment and construction markets.

Wajax, Toromont, and SMS Equipment are a few of Finning’s top competitors. Wajax operates more than 100 branches across Canada and caters to diverse industries ranging from construction, industrial, oil and gas, to metal processing, mining, and marine. SMS Equipment supplies a broad range of equipment, while Toromont supports market-leading brands of equipment, such as Caterpillar and AGCO.

Bottom Line

Finning enjoys the advantage of being a leading CAT dealer. An extensive global footprint, impressive portfolio of products and services, and a long-standing experience provide it an edge over the competition.

Finning has been gaining share in the construction markets and is well-positioned to leverage its digital capabilities to capture product support opportunities. The company has been witnessing notable increases in rental activity, machine utilization hours, and product support revenue run rates. As oil and other commodity prices recover business conditions will also prosper.

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DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.