Finning: Largest Caterpillar Distributor Set for Margin Improvement

Robert Robotti presented his in-depth investment thesis on Finning International (Toronto: FTT) at Wide-Moat Investing Summit 2017.

Finning International is the world’s largest Caterpillar distributor. It sells, rents, and provides aftermarket parts and service for Caterpillar equipment. Its exclusive distribution territories include the Western Canadian Provinces; Chile, Argentina, and Bolivia in Latin America; and the United Kingdom and Ireland. Undoubtedly in a cyclical industry, Bob views Caterpillar’s products as differentiated and backed by continual product research and advancement that makes it a wide-moat business. Separately, the exclusive geographic distribution of territories that Caterpillar designates provide an even wider moat for its exclusive distributors. In addition to its territorial exclusivity, Bob believes the distribution business, with its focus on aftermarket service and products, moderates the otherwise cyclical nature of the business. As a result, the company is FCF-generative through the cycle. Despite this wide moat, Finning’s return on invested capital has dramatically lagged the only other public “pure play” CAT distributor, Toromont Industries (Toronto: TIH). Bob believes the wide disparity in stock market valuations between Finning and Toromont should dissipate over time as Finning’s financial results should approach those of Toromont. Beginning in 2013, after years of focusing solely on revenue growth and operating margins, Finning hired a new CEO to reshape the company culture to one focused on driving returns on invested capital. The company remains committed to executing on its new set of operational priorities identified in 2013. However, the company’s achievements have been significantly masked by cyclical weaknesses in many of Finning’s exclusive geographies, further exacerbated by the predominance of energy and mining industries in many of those geographies. With a solid balance sheet, good free cash flows despite weak end markets, an improved cost structure, a focus on prudent capital allocation, and a profitable growth outlook, Bob believes that once the cycle turns Finning’s operating leverage will far exceed the market’s expectations.

Robert Robotti is the President of Robotti & Company. Prior to forming Robotti & Company, Incorporated in 1983, Bob was a vice president and shareholder of Gabelli & Company, Inc. He worked in public accounting before coming to Wall Street and is currently an inactive CPA. Bob holds a BS from Bucknell University and an MBA in Accounting from Pace University. Some of Bob’s areas of coverage include Special Situations, Energy Industry, Property-Casualty Insurance and Banking. Bob is the principal of the managing member or general partner of several investment vehicles. Bob currently serves on the Board of Directors of Panhandle Oil & Gas Company, a NYSE-listed diversified mineral company located in Oklahoma City; as Chairman of the Board of Directors of Pulse Seismic Inc., a seismic data licensing business located in Calgary, Alberta; and on the Board of Directors of Build with BMC, a privately held company specializing in building materials and construction services throughout the United States. In addition, he serves on the Boards of many non-profit organizations where he generously donates his time and expertise. Previously, Bob was a member of the Securities and Exchange Commission’s Advisory Committee on Smaller Public Companies, established to examine the impact of Sarbanes-Oxley Act and other aspects of the federal securities law.

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