Finning remains a buy for gains and cash

The Investment Reporter, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846

Key stock Finning International generated higher earnings and cash flow on slightly lower revenue in the first half of 2013. Even higher excess cash flow in the second half should enable it to repay debt and cuts its financing costs. Finning remains a buy.

We regularly review Key stock Finning International on The Back Page. Since we published our April 12 issue, its shares are down by 13.2 per cent. The world’s largest Caterpillar equipment dealer earned a little more in the first half of 2013. That’s despite low metals prices that have depressed mining activity. The company expects its cash flow to rise in the second half, which should reduce its debt. And its technical outlook is mostly positive. Finning remains a buy for long-term gains and rising dividends. It has raised its dividend every year since 2001, when it paid 10 cents a share.

In the six months to June 30, we calculate that Finning earned about $155.6 million, or 90 cents a share. This was up by 5.9 per cent from earnings of about $447 million, or 85 cents a share, a year earlier. This excludes other income and other expenses. It also excludes a one-time tax gain of about $5.2 million, or three cents a share, in the first half of this year.

Finning’s costs fell faster than its revenue

In the first half, Finning’s revenue declined by 1.7 per cent, to $3.18 billion. New and used equipment revenue fell by $230 million. This was only partly offset by a $174 million rise in product support, equipment rental and other revenue. Geographically, revenue fell by $243 million in Western Canada, the United Kingdom and Ireland. That was only partly offset by a $187 million rise in revenue in South America (Argentina, Bolivia, Chile and Uruguay). Finning writes that that there was “slower mining activity across all regions.”

In the first half, Finning’s cost of sales fell by five per cent, to $2.168 billion. Since this significantly exceeded the 1.7 per cent decline in the revenue, the gross profit climbed. The company’s gross profit of $1.012 billion was up by 6.1 per cent from a gross profit of $954 million a year earlier.

In the first half, selling, general and administrative expenses rose by 4.9 per cent, to $774 million. Finance costs jumped by more than 23 per cent, to $45.9 million. The acquisition of the mining product line of the former Bucyrus International added to selling, general and administrative costs. The money borrowed to pay for the acquisition raised the finance costs. The tax rate was lower in the first half.

On June 30, Finning’s net debt-to-cash-flow ratio was 3.1 times. That’s above our comfort zone of two times or less. And Finning’s cash flow largely depends on demand from cyclical resource industries.

In the first half, Finning’s cash flow jumped by 15.6 per cent, to $262.3 million. This confirms its better earnings. What’s more, the cash flow easily exceeded net additions to rental equipment of $51.4 million; net additions to property, plant and equipment of $40.6 million; and dividend payments of $50.3 million.

President and chief executive officer Scott Thomson expects the cash flow to increase further. He says, “We will see improved free cash flow performance in the second half of the year given a projected decrease in our inventories.”

Higher excess cash flow should enable Finning to repay part of its net debt of $1.742 billion. This will strengthen its balance sheet. In addition, repaying debt should cut Finning’s finance costs. This, in turn, should raise its profitability.

FINNING INTERNATIONAL $21.96 (Quality rating: Conservative; Sector: Resources; TSX—FTT; T: 604-331-4934; www.finning.com) remains a buy for long-term gains and rising dividends.

The Investment Reporter,, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846

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