Raymond James Citing a “constructive” outlook and “supportive” end markets, Raymond James analyst Bryan Fast is forecasting continued earnings growth for Finning International Inc. (FTT-T) through the end of 2022 after it secured a “massive” contract win in Chile.
On Tuesday, Finning and industry bellwether Caterpillar Inc. (CAT-N) announced a deal to replace the haul truck fleets for BHP at its Escondida copper mine in Chile. It’s one of the largest fleets in the world.
“The massive equipment order reflects positively for Finning (and other equipment dealers) as long-term investments decisions push forward as resource companies balance energy transitionand decarbonization efforts with commitment to meet demand for resources,” said Mr. Fast. “We expect a continuation of this trend and highlight the equipment dealers as beneficiaries.”
“While the business is operating well, there are external factors that present risks including constitutional reform in Chile, volatility in commodity prices, inflationary pressures and an economic slowdown. Focusing on the controllable, Finning has displayed improvements in the operating model, with a leap forward in execution, driving earnings beyond prior peaks, something we believe has yet to be reflected in its valuation.”
Calling its “attractive” valuation “increasingly difficult to ignore,” the analyst maintained an “outperform” rating and $39 target for Finning shares, which is 75 cents lower than the consensus.
“On a relative basis, Finning’s stock is trading at a 10-times discount to peer Toromont, which is an improvement from 12 times last month, but it remains well above the historical average at 3.6 times,” said Mr. Fast. “The spread is increasingly difficult to ignore as Finning continues to deliver operationally. Further, the stock is trading at 1.9-times book value, which is below the 20-yr average of 2.3 times and approaching one standard deviation below the long-term average. We note this has only happened three times in the last 15 years. We believe these levels represent strong downside support”
Elsewhere, reiterating an “outperform” rating and $40 target, National Bank Financial’s Maxim Sytchev said: “It’s interesting to observe the dichotomy of FTT shares floundering (down 13 per cent year-to-date vs. TSX down 8 per cent) amidst the broader Chilean Index (S&P IPSA) actually advancing 29 per cent year-to-date (lower currency of course helps here as we are talking about local denomination). Nevertheless, with Canadian investors being highly concerned about the September 4 vote on the new constitution (that does not appear to have enough votes to be changed, based on most recent polls), the resource and financials-heavy local index is chugging along. From FTT’s perspective, this is a major win as the mine is going to an all-CAT offering (the site now is mixed, predominantly CAT, however) while also validating a thesis that aged mining equipment will need replacement, regardless of what might be happening from a political standpoint. We believe that Canadian oil sands fleets are in a similar age group (10 to 12 years old), right on the cusp of a material refresh / rebuild cycle. While there are no numbers in the press release, large, brand-new mining trucks are somewhere in the US$5-million range (list prices are not advertised), depending on configuration. Importantly, the eventual tail of Product Support is as important as selling the original gear. Overall, the announcement is showing that Finning/CAT are able to win contracts even in this uncertain environment. FTT shares continue to impute a dislocated vs. commodity pricing dynamic (as measured by WTI/copper index.)”