Headquartered in Vancouver, Finning is the biggest dealer of Caterpillar equipment in the world. In addition to British Columbia, Alberta, the Northwest Territories and the Yukon, this Canadian global stock does business in Chile, Argentina, Bolivia and Uruguay, as well as in both the United Kingdom and Ireland. But, according to Dundee Capital Markets Managing Director and Head of Research Maxim Sytchev: as Caterpillar Inc. goes, so goes Finning.
When it comes to Finning International Inc. (TSX─FTT), Dundee Capital’s Maxim Sytchev thinks investors have to get real, suggesting they’re clinging to unrealistic forecasts.
He’s basing his opinion on a recently announced restructuring and cost-cutting effort at Caterpillar Inc. (NYSE─CAT), the Peoria-based maker of construction and mining equipment.
These moves are critical to Finning, a dividend paying global stock that is the world’s biggest dealer of Caterpillar products. So, Mr. Sytchev’s “sell” for Finning should come as no surprise. He had pegged the company at neutral.
He’s also cutting his 12-month price target to $19.50 from $26 a share. He writes:
Caterpillar is now pegging its 2015 sales at US$48 billion — $1 billion less than before. More importantly, for 2016, the company sees its sales coming in at roughly US$45.5 billion — five per cent lower than in 2015. By contrast, the consensus crew is pegging sales at US$48.4 billion.
Caterpillar is blaming its lower numbers on what is says is a convergence of challenging conditions in key sectors — namely mining and the oil patch. And although 2015 is the company’s third consecutive year of declining sales, 2016 could be the first time in its 90-year history that sales fall four years in a row.
As Caterpillar goes, so goes Finning
As far as Finning is concerned, Caterpillar’s actions are really a culmination of our thinking. Indeed, staying with Finning over the long term is simply a transitory dynamic. After all, any working capital that it’s freeing up reflects lackluster levels of activity.
And although some folks have pegged Finning’s net earnings for 2016 at $1.84 a share, this forecast is simply unrealistic, given Caterpillar’s latest actions.
Admittedly, Finning will continue to generate cash flow from its product support division. But this won’t be enough to offset the lack of growth year over year.
In fact, we think Finning’s 2016 EPS will actually trail its estimated net income for 2015: $1.61. Not surprisingly, we’re now pegging the company’s net income for 2016 at $1.45 a share.
Elsewhere, we think base metals will continue to be squeezed by the slowdown in the Chinese economy — something that’s clear from the ratio of capital intensity to gross domestic product.
Although that multiple had been sitting at an all-time high, it will now likely grind lower over the coming years. Simply put, China now needs air purification filters, but not roads and bridges to nowhere.
Latin America dims this global dividend stock’s outlook
Elsewhere, Finning has a lot to lose as Latin American mining companies face increasingly bad debts, as well as continued struggles with free cash flow. In fact, investors should keep in mind that in 2014, Latin America accounted for 37 per cent of this dividend paying multinational corporation’s EBITDA (earnings before interest, taxes, depreciation and amortization).
For our part, we see only a downside for Finning, given that the current multiple of enterprise value to EBITDA for 2016 will simply expand as forecasts catch up with economic reality.
And what about the effect of Caterpillar’s belt-tightening on Toromont Industries Ltd. (TSX─TIH), an Ontario-based seller of heavy equipment?
It’s much less pronounced, given that Toromont gets most of its revenue from infrastructure spending, while 85 per cent of its business is sourced in Ontario.
Investor’s Digest of Canada, MPL Communications Inc.
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