FINNING UPGRADED AS MINING FUNDAMENTALS IMPROVE

The recovery in equipment demand looks well underway, and Canaccord Genuity analyst Yuri Lynk thinks that warrants an upgrade of Finning International Inc.

Raising his recommendation on the stock to buy from hold, and hiking his price target to $30 from $ 26, Lynk highlighted Caterpillar Inc.’s first quarter conference call, where it forecasted a significant increase in large mining truck shipments for 2017.

Toromont Industries Ltd.’ s recent results provided further confirmation that mining fundamentals are improving, as both new equipment sales and rebuilds rose on strong demand.

Lynk highlighted Toromont’s 128 per cent year-over-year increase in mining bookings in the first quarter.

The analyst believes Finning’s adjusted earnings per share could double from 2016 and still not achieve mid-cycle levels nearly $2 per share. He pointed to the company’s $ 200 million in cost savings, which equates to $1.20 per share.

“We believe it is worth noting that there are only two buy ratings on Finning and five holds,” Lynk said. “If others were to become more bullish on Finning’s long-term prospects like we are, it could act as a share price catalyst.”

The analyst also noted that Finning shares have lagged peers in 2017, declining about one per cent, compared to a gain of 14 per cent for Toromont and 10 per cent for Caterpillar.

Based on 2018 estimates, Finning is trading at aP/ E multiple of 17.6x, which is 12 per cent below Caterpillar’s and 16 per cent below Toromont’s.

“We see room for this gap to close as, historically, these stocks have generally traded in a tighter range,” Lynk said.