Finning International's EPS Surge: A Signal of Sustainable Growth in Heavy Equipment Demand?

Finning International (TSX: FNT) delivered an 18% year-over-year leap in adjusted EPS to C$0.99 in Q1 2025, outpacing estimates and sparking investor optimism. But is this a fleeting rally or a harbinger of durable earnings momentum? Let’s dissect the drivers, valuation, and strategic tailwinds to determine whether this is a buy-or-bust moment for heavy equipment investors.

The Q1 Growth Drivers: Structural or Transient?

Finning’s Q1 results were propelled by three pillars:
1. New Equipment Sales Surge: Revenue from new equipment rose 7.2% to C$835 million, driven by robust demand in mining (Chile), oil/gas (Western Canada), and construction (UK). This segment’s strength reflects rising commodity prices and infrastructure spending in key geographies.
2. Strategic Asset Monetization: The C$450 million sale of 4Refuel—a non-core aviation fuel business—boosted liquidity and signaled capital discipline. While this was a one-time gain, it underscores management’s focus on optimizing the portfolio.
3. Cost Control Excellence: Despite a 26% drop in used equipment sales and weaker rental demand, Finning maintained margins through operational efficiency. This resilience suggests the core business is lean and adaptable.

Key Takeaway: While asset sales contributed to cash flow, the earnings growth is largely underpinned by structural demand in mining and energy sectors. Caterpillar’s global equipment orders (Finning’s primary supplier) have surged 14% YoY in 2025, a positive sign for Finning’s sales pipeline.

Valuation: Undervalued Relative to Peers?

Finning’s valuation multiples are compelling compared to peers like Caterpillar (CAT) and Deere (DE):

- P/E Ratio: Finning’s 2025E P/E of 15.1x is slightly below Caterpillar’s 15.2x and Deere’s 14.1x, despite stronger EPS growth.
- EV/EBITDA: At 7.5x, Finning trades at a discount to Caterpillar’s 14.25x and Deere’s 11.5x, reflecting its smaller scale but higher growth trajectory.
- P/B Ratio: Finning’s 2.7x aligns with its peers, suggesting no overvaluation in book value terms.

Why This Matters: Finning’s valuation is fairly priced given its geographic diversification and exposure to high-growth regions like Chilean mining and UK infrastructure. Caterpillar and Deere, while cheaper on some metrics, face headwinds like U.S. tariff pressures and slower agricultural demand. Finning’s focus on high-margin aftermarket services (parts and maintenance) also positions it to weather cyclical downturns better.

The Case for a “Buy” Rating: Three Compelling Catalysts

1. Infrastructure Spending Waves: Governments globally are prioritizing infrastructure (e.g., Canada’s C$180 billion plan, Chile’s copper investments). Finning’s equipment sales directly feed into these projects, with a backlog that could sustain growth through 2026.
2. Dividend Resilience: Finning’s dividend yield of 3.2% is well-covered by free cash flow (FCF) of C$280 million in Q1. Even if used equipment sales remain weak, FCF from core operations supports payouts.
3. Margin Expansion Potential: With costs under control and pricing power in equipment sales (Caterpillar’s price hikes averaged 5% in 2025), Finning could boost margins to 12–14% from 10.7% in 2024.

Risks to Consider

• Commodity Volatility: A sudden drop in oil/gas prices or copper demand could stall equipment sales.
• Used Equipment Drag: The 26% decline in used equipment revenue may persist if secondary markets remain sluggish.
• Debt Management: While Finning’s leverage ratio (0.7x net debt/EBITDA) is healthy, further acquisitions could strain balance sheet flexibility.

Final Analysis: A Buy for Long-Term Value

Finning’s Q1 results are not a flash in the pan. The EPS surge reflects sustainable demand from mining and infrastructure sectors, operational discipline, and a smart portfolio strategy. With valuation multiples below peers and a dividend that rewards patience, this is a buy for investors willing to ride the heavy equipment recovery wave.

Actionable Takeaway:
- Target Price: C$52–C$55 (20% upside from current C$45.50) based on 2025E EPS of C$1.20 and a 15–16x P/E multiple.
- Risks: Monitor Caterpillar’s Q2 2025 results (July) for broader industry trends.

Invest now in Finning International to capitalize on the structural revival of global heavy equipment demand—before the market fully prices in its upside.