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Why Finning International Inc. Is Moving Higher Today

Finning International Inc. (TSX:FTT), the world’s largest Caterpillar equipment dealer, released its fourth-quarter earnings results this morning, and its stock has responded by rising about 1% in early trading. Let’s break down the quarterly results and the fundamentals of its stock to determine if we should be long-term buyers today.

A very strong quarter of double-digit growth

Here’s a quick breakdown of 10 of the most notable statistics from Finning’s three-month period ended December 31, 2017, compared with the same period in 2016:

Metric Q4 2017 Q4 2016 Change
New equipment revenues $661 million $519 million 27.4%
Used equipment revenues $110 million $96 million 14.6%
Equipment rental revenues $60 million $56 million 7.1%
Product support revenues $901 million $816 million 10.4%
Total revenues $1,735 million $1,491 million 16.4%
Adjusted EBITDA $158 million $117 million 35.0%
Adjusted EBIT $113 million $70 million 61.4%
Free cash flow $350 million $113 million 209.7%
Adjusted net income $67 million $47 million 42.6%
Adjusted earnings per share (EPS) $0.40 $0.28 42.9%

What should you do now?

It was a phenomenal quarter overall for Finning, and it capped a fantastic year for the company, in which its revenue increased 11.3% to $6.27 billion, its adjusted net income increased 55.8% to $229 million, and its adjusted EPS increased 54.5% to $1.36 compared with fiscal 2016. With these incredibly strong results in mind, I think the market has responded correctly by sending its stock higher, and I think it still represents a great investment opportunity for the long term for two fundamental reasons.

First, it’s undervalued. Finning’s stock currently trades at 25 times fiscal 2017’s adjusted EPS of $1.36 and 19.7 times the consensus analyst estimate of $1.73 for fiscal 2018, both of which are inexpensive given its current earnings-growth rate and its estimated 10% long-term earnings-growth rate.

Second, it’s a dividend aristocrat. Finning pays a quarterly dividend of $0.19 per share, representing $0.76 per share annually, which gives it a solid 2.2% yield. Its yield may not be the highest around, but it’s very important to note that its 4.1% dividend hike in August 2017 has it positioned for 2018 to mark the 17th consecutive year in which it has raised its annual dividend payment, making it one of the best dividend-growth stocks in the market today.

With all of the information provided above in mind, I think Foolish investors should strongly consider beginning to scale in to long-term positions in Finning International today.

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Fool contributor Joseph Solitro has no position in any stocks mentioned. Finning International is a recommendation of Stock Advisor Canada.

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