Industrial companies are gaining a bid as government spending is expected to result in a healthy dose of activity. One of these Canadian stocks that is riding this momentum to near all-time highs is Finning International (TSX:FTT).
Finning is a global dealer and distributor of Caterpillar products. As a full, end-to-end Caterpillar service company, it not only sells and rents Caterpillar machinery but also provides parts and services for equipment and engines. Finning services the mining, construction, petroleum, forestry, and power system application industries and has operations worldwide. The company’s primary base of operating includes Canada, South America, UK, and Ireland.
Over the past year, the company’s share price has been white-hot. Finning’s shares have climbed by approximately 67% and are just shy of the all-time high close of $34.77 achieved back in February of 2018.
The question is, can it sustain enough momentum to finally break the $35.00 range and run into the 40s? Finning has been here several times before. If you take a look at its chart, you’ll notice that Finning has bumped up against these levels three times before (2007, 2014, 2011).
Market Cap: $5.38 billion
Forward P/E: 19.53
Dividend Growth Streak: 19 years
Payout Ratio (Earnings): 71.93%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 0.00%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only
In each instance, the company suffered a pretty significant setback that sent its share price crashing back into the teens. This isn’t exactly a chart that instills confidence. On the bright side as the saying goes, “the past is not an indication of future success”.
What will the future bring?
Well let’s start with company valuation. Finning is currently trading at around 23.5 times earnings, 2.5 times book value, and has a PE to growth (PEG) of 1.28. In each case, while they are above the company’s historical averages, they are slightly below the industry averages.
The company looks particularly attractive against Toromont (TSX:TIH) which we consider its main competitor in the space.
While the valuation does look attractive against comparable companies, it is important to question whether or not this valuation is justified. The company’s growth profile hasn’t been great. In fact, it generated less revenue in 2020 than in did back in 2014. Quite simply there has been a lack of consistency as the company operates in a cyclical industry.
Analysts estimate that annual earnings per share will only top 2019 levels in 2022 and that revenue won’t top pre-pandemic levels until at least 2024. Those are some pretty long recovery timeframes. Couple this with the fact Finning is trading above 3YR and 5YR historical averages, investors should proceed with caution.
What about that dividend?
While valuation may be of concern, Finning is one of the most reliable dividend growth stocks in the country. It is a Canadian Dividend Aristocrat/All Star and has a 19-year dividend growth streak. This is tied for the 15th longest streak on the country.
While dividend growth has slowed in recent years, the streak is quite impressive given the inconsistent growth the company has experienced. It sports a decent yield (2.45%) and has also kept a respectable payout ratio over the years (high 50s).
There is no question that Finning has been a rock solid income stock. If you are researching in search of excellent income stocks, you could also look at players within Canada’s finance sector, like The Royal Bank of Canada (TSE:RY).
All things considered, Finning is a stock that is currently riding a wave of positive momentum. While this momentum could take the company into blue sky territory, investors should approach with caution. It appears much of the good news has already been baked into the share price.
Analysts only have a one-year price target of $35.21 on the stock which I think is quite reasonable. This implies mid, single digit upside from today’s price.
Finning looks like a low reward investment here and given the cyclical nature of the industry, there is a risk of a potential collapse. We’ve seen it many times before, and the future expected growth rates may not be enough to sustain this momentum long term.