FINNING INTERNATIONAL INC. $23(Toronto symbol FTT; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 168.1 million; Market cap: $3.9 billion; Price-to-sales ratio: 0.6; Dividend yield: 3.2%; TSINetwork Rating: Above Average; 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-201 6. That’s in addition to the 1,900 workers, or 13% of its global workforce, it laid off last year.
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%.
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.
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