Commodity market uncertainty elicits Finning International downgrade

Finning International Inc. was downgraded by Raymond James as a result of increasingly uncertain global commodity markets and the often lengthy timeline for value-creating initiatives.

Analyst Ben Cherniavsky lowered his rating on the Caterpillar Inc. equipment dealer’s shares to market perform from outperform, while maintaining a price target of $34.50.

He noted that a major part of the bullish argument for Finning is that its “self-help” initiatives will drive earnings-pershare growth in a soft economic environment.

Mr. Cherniavsky is still confident this will happen, but pointed out that unlocking shareholder value is often an extended journey and real change takes time.

“Furthermore, with the global commodity outlook becoming more uncertain, the macro risks to this story are, in our view, rising,” he told clients. “In short, we feel that the risk-return profile of Finning’s stock has become sufficiently less attractive and warrants a downgrade, particularly in light of its recent multiple expansion.”

Finning’s share price is up nearly 50% in the past 12 months, compared to an 18% gain by both competitor Toromont Industries Ltd. and the S&P/TSX composite index.

However, Mr. Cherniavsky noted that despite Finning’s progress in the past year, a wide performance gap remains between it and Toromont on several measures, notably including Toromont’s much stronger balance sheet.