Vancouver-based Finning International is the world’s largest dealer of Caterpillar equipment.Seth Perlman/The Associated Press
The euphoria that lured investors to Finning International Inc"s shares has fallen by the wayside.
In January 2012, the Vancouver-based company, which sells, services and leases heavy-duty machinery for the mining, energy and power sectors, struck a $465-million (U.S.) deal to buy a unit of Caterpillar Inc. that specialized in mining machinery.
Investors initially reacted with glee, and within a month the stock popped roughly 25 per cent. But the quick rise was short-lived, and now the shares are worth less than they were right before the deal was announced.
The root problem: mining isn't a very sexy sector right now. Finning was heavily skewed toward mining to begin with, but the acquired business, named Bucryus, was particularly focused on mining equipment.
"It won't be news for you that we don't expect to have a very active year for mining new equipment sales," chief operating officer Juan Carlos Villegas said on the company's last quarterly call.
First-quarter sales in Canada, where mining is a key sector, were down 20 per cent for the same period a year ago. And Canada accounts for half of Finning's revenues, so what happens here has a big impact on the bottom line.
To counter, Finning likes to point out that even though mining is soft, new South American sales – a key region for the Bucyrus unit – more than offset the Canadian and U.K. slump.
Plus, Finning makes a big chunk of money from servicing existing equipment – something its clients are doing in order to get a longer life out of existing machinery that they already own.
"As suspected we have seen mining customers reduce spending on new equipment, however, copper at $3-plus (U.S.) is still a favourable equation and with the current equipment population active and at full capacity, we expect another strong year in product support," Mr. Villegas said.
Given this diversity between new products and servicing, some people think Finning's been unfairly punished in the markets. "Finning looks particularly beaten up to us," noted Raymond James analyst Ben Cherniavsky. The company continues to churn out year-over-year earnings per share growth – though that's boosted by the acquisition – and its stock has only traded down to this price-to-earnings multiple three times in the past 15 years, he found.
But a recovery will largely depend on the strategy put in place by new chief executive officer Scott Thomson, who was appointed in May. Mr. Thomson was most recently the chief financial officer of Talisman Energy, so he is both an outsider to Finning, as well as an outsider to the industry.
The upshot is that he has international experience and plans to stay with the company for quite some time, allowing him to oversee a long-term strategy.
The question now is how well Mr. Thomson can pivot the company to instill some investor confidence again. Failing that, the stock price could be stuck in a long slog, given that the outlook isn't particularly rosy for many miners.
(Tim Kiladze is a Globe and Mail Reporter.)
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Tim Kiladze