Power Systems Backlog And Product Support Services Will Strengthen Future Prospects

Key Takeaways

• Strong growth in equipment sales and increased product support revenues in key regions indicate positive momentum for future revenue growth.
  
• Diversification into higher-margin services and effective cost management are expected to enhance operational efficiency and boost net margins.
  
• Currency fluctuations, labor challenges, and political risks may impact Finning International's revenue growth and net margins across South America and Canada.

Catalysts

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

• Strong growth in new and used equipment sales, along with a 6% increase in product support revenues in South America and a 5% increase in the UK and Ireland, suggest a positive momentum that can drive further revenue growth.
  
• The ongoing diversification of Finning's product support services, including development of fused equipment and enhanced Power Systems offerings, is expected to boost net margins due to higher-margin service revenue replacing lower-margin equipment sales.
  
• Significant backlog increases, particularly a 70% rise in Power Systems backlog and 150% increase in data center projects in the UK, indicate robust future demand that can enhance earnings and stabilize revenue streams.
  
• Continuous improvements in SG&A cost management, as evidenced by a new low of 16.3% of net revenue, aim to increase operational efficiency and contribute to higher net margins in the long term.
  
• Focus on optimizing working capital and invested capital velocity, as demonstrated by automation initiatives in parts distribution, is anticipated to further boost free cash flow and return on invested capital (ROIC).

Finning International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Finning International's revenue will decrease by 0.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.5% today to 5.6% in 3 years time.
• Analysts expect earnings to reach CA$620.2 million (and earnings per share of CA$4.95) by about March 2028, up from CA$509.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, up from 10.7x today. This future PE is lower than the current PE for the CA Trade Distributors industry at 12.4x.
• Analysts expect the number of shares outstanding to decline by 4.69% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.85%, as per the Simply Wall St company report.

Finning International Future Earnings Per Share Growth

Risks

• The weaker Chilean peso to U.S. dollar exchange rate could impact Finning International's product support revenue in South America, affecting overall earnings and revenue growth potential.
  
• Persistent slower activity in the Canadian construction sector may lead to lower product support revenues, affecting Finning's revenue growth in this market.
  
• The competitive labor market for qualified technicians and challenges in retaining skilled labor, particularly in South America, could lead to increased wage costs and impact net margins.
  
• The rental business in Canada is experiencing softer performance due to reduced fleet size and lower utilization levels, which may impact overall rental revenue growth and net margins.
  
• Political uncertainties, recent tariff discussions, and changes in Canadian government policies may create additional uncertainties for customers, impacting capital investment decisions, which could potentially affect revenues and future earnings.

Valuation

• The analysts have a consensus price target of CA$49.667 for Finning International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$55.0, and the most bearish reporting a price target of just CA$46.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$11.1 billion, earnings will come to CA$620.2 million, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 7.9%.
• Given the current share price of CA$40.51, the analyst price target of CA$49.67 is 18.4% 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.