Booming South American Mining And Data Center Demand Propel Growth And Profits

Key Takeaways

• Continued demand in South America's mining sector and investments in capacity are expected to enhance revenue, margins, and earnings growth.
  
• Operational restructuring and cost reduction efforts are anticipated to lower expenses and improve net margins, boosting earnings per share.
  
• Dependency on South American performance amidst Canadian challenges and reduced rental revenue shows vulnerability to regional risks and market pressures impacting profitability.

Catalysts

Sells, services, and rents heavy equipment, engines, and related products in Canada, Chile, Bolivia, the United Kingdom, Argentina, Ireland, and internationally.

• Continued strong demand in South America, particularly in the mining sector, driven by copper demand, is expected to drive robust new equipment sales and future product support growth. This is likely to impact revenue and gross margins positively.
  
• Significant investments in capacity and capabilities in South America, including new work bays and an increase in technician headcount, are expected to support future revenue growth and improve operational efficiencies, impacting net margins and earnings.
  
• Growing order backlog in the power systems sector, particularly due to demand from the data center market, is expected to drive long-term sustainable revenue growth and improved earnings visibility.
  
• Operational restructuring in Canada and ongoing cost reduction initiatives across the company, including the decentralization of functions, are expected to sustainably lower SG&A expenses, thus improving net margins and potentially increasing earnings per share (EPS).
  
• Increasing participation in the used equipment market, with significant year-over-year sales growth, particularly in South America and the U.K., is expected to provide a revenue boost and improve free cash flow, contributing positively to earnings.

Finning International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Finning International's revenue will decrease by -1.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.1% today to 6.1% in 3 years time.
• Analysts expect earnings to reach CA$633.0 million (and earnings per share of CA$4.74) by about January 2028, up from CA$453.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.5x on those 2028 earnings, up from 11.3x today. This future PE is lower than the current PE for the CA Trade Distributors industry at 13.2x.
• Analysts expect the number of shares outstanding to decline by 0.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.7%, as per the Simply Wall St company report.

Finning International Future Earnings Per Share Growth

Risks

• The Canadian business has been impacted by dynamic operating conditions, with lower margins and challenging market conditions, leading to a decrease in adjusted EBIT by 31% from Q3 2023, potentially affecting overall net margins and profitability.
  
• Delays in maintenance spending and optimization of mine plans by large oil sands customers in Canada have resulted in lower product support revenue, which could impact earnings if these deferrals continue.
  
• The company's reliance on strong performance in its South American segment, while positive, exposes it to regional risks, including labor challenges, which could impact future revenue growth if not managed effectively.
  
• Increased competition and market pressures have led to lower rental revenue in Canada, down by 12% due to lower utilization factors across all regions, affecting overall revenue.
  
• Adjusted EBIT in South America was down due to higher SG&A expenses and a higher mix of equipment revenue, highlighting potential risks to achieving target profit margins despite strong sales growth.

Valuation

• The analysts have a consensus price target of CA$47.44 for Finning International based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$10.4 billion, earnings will come to CA$633.0 million, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 7.7%.
• Given the current share price of CA$37.5, the analyst's price target of CA$47.44 is 21.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.