On today’s TSX Breakouts report, there are 38 stocks on the positive breakouts list (stocks with positive price momentum), and 22 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that surfaced on the positive breakouts list - Finning International Inc. (FTT-T). The company will be reporting its third-quarter financial results after the market closes on Mon. Nov. 7. Recently, industry peer Caterpillar Inc. (CAT-N) reported solid third-quarter earnings and management provided a positive outlook. If Finning follows suit, its recent positive price momentum may continue.
This dividend stock has eight buy recommendations and one “market perform” recommendation. The average one-year price target implies a potential price return of 32 per cent.
A brief outline on Finning is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Vancouver-based Finning is the world’s largest Caterpillar dealer. The company supplies parts and services, sells and rents equipment. The company serves businesses across various industries such as construction, mining, energy, power systems, agriculture and forestry. In 2021, product support represented 55.7 per cent of net revenue, new equipment sales accounted for 32.7 per cent of net sales, used equipment was 6.1 per cent of revenue, 3.5 per cent was equipment rental revenue, and 2 per cent was fuel and other.
In terms of geographical revenue breakdown, the company segments its business into three regions: western Canada, South America (Chile, Argentina and Bolivia), and the United Kingdom and Ireland. In 2021, 50 per cent of the company’s net revenue was from Canada, 33 per cent stemmed from South America with 17 per cent from the U.K. and Ireland.
Investment thesis
- Market leader.
- Healthy balance sheet. Net debt-to-adjusted EBITDA [earnings before interest, taxes, depreciation and amortization] stood at 1.8 times as at June 30.
- Reliable quarterly dividend with room for future dividend increases.
- Healthy corporate balance sheets supportive of capital spending by companies.
- Support from government infrastructure spending commitments.
- Strong quoting activity - positive for backlog (future revenue) growth.
- Reasonable valuation.
- Potential key risk to consider: recession/global economic weakness.
Industry conditions
On Caterpillar’s third-quarter earnings call held on Oct. 27, chairman and chief executive officer Jim Umpleby highlighted the strong industry conditions, “While we continue to closely monitor global macroeconomic conditions, overall demand remains healthy across our segments. We expect top line growth in the fourth quarter, both year-over-year and sequentially. This expected performance reflects healthy demand and favorable price realization. We anticipate sales increases across our three primary segments as order levels and backlogs remain strong.” CAT’s share price jumped nearly 8 per cent on Oct. 27.
Finning’s quarterly earnings and outlook
After the market closed on August 2, Finning reported its second-quarter financial results.
EBITDA increased 27 per cent year-over-year to $271-million. Earnings per share came in at 80 cents, up 43 per cent year-over-year and above the consensus estimate of 66 cents. The company’s equipment backlog, reflecting future revenue, climbed to $2.1-billion, up 4 per cent sequentially. Return on invested capital (ROIC) was 17.4 per cent in Canada, 22.3 per cent in South America and 16.2 per cent in the U.K. and Ireland. Consolidated ROIC was 17.5 per cent. The share price rallied 7 per cent the following trading day on high volume.
On the earnings call, president and chief executive officer Scott Thomson provided a positive outlook, “Our customers continue to be busy. We expect that project backlog, healthy customer balance sheets and high machine utilization rates will continue to support strong demand for equipment, parts and maintenance. Following our strong EPS [earnings per share] growth of 52 per cent in the first half of 2022 compared to adjusted EPS in the first half of 2021, we expect demand conditions to remain favorable for the remainder of 2022. Underpinned by our large and diverse backlog, continued growth in product support and disciplined operational execution, we are projecting above mid-teens EPS growth in the second half of 2022 compared to the second half of 2021.”
Chief financial officer Greg Palaschuk noted, “Depending on supply and delivery schedules, we expect to deliver roughly 7 per cent of our backlog this year. We’re pleased to have already secured a backlog of over $600-million of new equipment for 2023. With strong quoting activity, particularly in mining, the 2023 backlog will continue to grow from this very solid base through the second half of the year. We saw strong demand for rental equipment and high rental utilization in Q2 [second quarter] and supply challenges persistent. Product support revenue increased across all regions, led particularly by strong growth in Canada.”
The company will be releasing its third-quarter financial results after the market closes on Nov. 7. The consensus revenue, EBITDA and earnings per share estimates are $1.993-billion, $264-million, and 75 cents, respectively. Management will be hosting an earnings call at 10 a.m. ET on Nov. 8.
Returning capital to shareholders
The company pays its shareholders a quarterly dividend of 23.6 cents per share, or approximately 94 cents per share yearly. This equates to a current annualized dividend yield of 3.2 per cent.
During the quarter and first half of 2022, the company repurchased shares at a cost of $61-million and $122-million, respectively.
Analysts’ recommendations
There are nine firms providing research coverage on this company, of which eight analysts have buy recommendations and one analyst (BMO’s Devin Dodge) has a ‘market perform’ recommendation.
The firms providing research coverage on the company are: BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, National Bank Financial, Raymond James, RBC Dominion Securities, Sadif Investment Analytics, Scotiabank and TD Securities.
Revised recommendations
A couple of analysts have revised their expectations in recent weeks.
- CIBC’s Jacob Bout lowered his target price to $37 from $38.
- Scotiabank’s Michael Doumet trimmed his target price to $35 from $39.
Financial forecasts
Currently, little earnings growth is anticipated by analysts next year.
The consensus EBITDA estimate is $1016-million in 2022, holding steady at $1017-million in 2023. The Street is forecasting earnings per share of $2.87 in 2022 as well as in 2023.
Earnings expectations have increased for this year but remained relatively unchanged for next year. Four months ago, the Street was forecasting EBITDA of $959-million in 2022 and $1011-million in 2023. The consensus earnings per share estimates were $2.61 in 2022 and $2.83 in 2023.
Valuation
The stock’s valuation appears attractive - low relative to historical levels.
According to Bloomberg, the stock is trading at a price-to-earnings multiple of 10.2 times the 2023 consensus estimate, below its ten-year historical average of 13.4 times.
The average one-year target price is $38.57, suggesting there is 32 per cent upside in the share price over the next 12 months.
Insider transaction activity
Quarter-to-date, there has not been any trading activity in the public market reported by insiders.
Chart watch
Quarter-to-date, the share price is up 20 per cent, making Finning the third-best performing stock in the S&P/TSX Industrials (sector) index.
Given this recent strength in the share price, the share price is now down 8 per cent year-to-date, matching the performance of the S&P/TSX composite index.
Looking back over the past decade, the share price has traded largely between $20 and $35, and is currently near the middle of this range.
Looking at key resistance and support levels, the share price is approaching major overhead resistance around $35. After that, the next resistance level is around $40, near its record closing high of $39.66 set on April 19 2022. On a pullback, the stock price has initial technical support around $25. Failing that, there is strong technical support around $20.
ESG Risk Rating
According to risk provider Sustainalytics, Finning has an ESG (environmental, social and governance) risk score of risk score of 15.5 as of July 17, 2022. A risk score of between 10 and 20 reflects a “low risk” rating.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
This report is not an investment recommendation.
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Jennifer Dowty