[Please note that all currency references are to U.S. dollar except if indicated otherwise.]
TFI International (NYSE:TFII) is a medium-sized transport and logistics company headquartered in Quebec, Canada. The shares of the company trade on the Toronto Stock Exchange and since February 2020 also on the New York Stock Exchange. The company has developed a strong track record of profitable growth over the past two decades but remains small compared to the industry leader, United Parcel Service (UPS).
In a fragmented industry, this provides ample opportunities for the company to grow by acquisition, which it has done successfully in the past. On various metrics, TFI is more profitable than its peers, generates better cash flow, and is growing faster.
The share price has gained 700% over the past decade, outperforming its peers by a wide margin but the valuation is still lower than a representative peer group and considerably lower than UPS.
A high-performing mid-sized operation
TFI is a mid-sized transportation and logistics business that operates 562 facilities in Canada, the United States, and Mexico. The company employs 28,286 people and 6,845 independent contractors and operates 13,206 tractors and 48,817 trailers.
Over the past 12 months, until the end of June 2022, TFI had revenues of $8.9 billion, and net income of $771 million. Based on revenues, the company is about 1/10 the size of the North American industry transport and logistics leader, UPS.
TFI operates in four verticals, namely Truckloads, Logistics, Less-Than-Truckload, and Package and Courier. The split in revenues is indicated in the graph. The bulk of the revenues are generated in the U.S. (70%), followed by Canada (29%), and a minor portion in Mexico. Customers hail from a variety of industries with retail, manufacturing, automotive, building materials, metals and mining, and food and beverages representing the bulk of the customer base.
A long-term track record of profitable growth
The company has an excellent track record of profitable growth. Over the two decades until the end of 2021, revenues, EBITDA, cash from operations, and earnings per share have all grown at a compounded rate of around 15% per year.
Shareholders benefitted from this growth with a total return of 22% per year over the past 20 years. Compared to the well-regarded industry leader, UPS, TFI also stacks up well. United Parcel Services has a long track record of consistent growth, stable profit margins, and high returns on capital.
As mentioned above, TFI is about 1/10th of the size of UPS - the base to grow is therefore much smaller for TFI. Still, the gross profit and earnings per share growth rates of TFI were considerably faster than UPS over the past five years. On the two measures of profitability that we present in the graph, UPS is ahead on the average return on capital employed while TFI has slightly higher average EBITDA margins.
Last, TFI also has a very high cash conversion ratio as measured by the amount of free cash flow as a portion of the gross profit - also on this count, it is way ahead of UPS.
TFI operates in a highly competitive industry, and margins and profitability can vary considerably through the economic cycles. Still, TFI has remained profitable even during the most challenging economic times such as during the global financial crisis in 2008-09. The table below indicates the degree of volatility that investors could expect regarding key performance measures.
Measured over the past 15 years, the gross profit margin, for example, varied between 52.2% and 28.0% with an average of 41.1%. Also noticeable is the improving trend in key indicators over the past five years.
Multiple growth levers
Growth by acquisition has been a major driver of the expansion of the business. Since 2008, the company completed 107 acquisitions with the most recent significant transaction the USD800 million acquisition in 2021 of the ground freight (mostly Less-Than-Truckload) business of UPS. The company lists several key criteria in its acquisition process including: An immediate accretion to earnings per share and free cash flow- A natural fit with at least one of the four business segments and- A U.S. or Canadian footprint.
Company management considers the industry as fragmented which implies that opportunities for acquisitions are readily available. The sound balance sheet should support further growth by acquisition. Organic growth is driven by the secular expansion of eCommerce and the industrial transport opportunities that arise from more onshore manufacturing.
Management indicates that its revenues from shipping and last-mile logistics related to eCommerce have grown exponentially in the past decade with the company now offering eCommerce services from 80 North American cities. The balance sheet is in good order and positive cash flow.
The company had shareholders' equity of $2.4 billion by the end of June 2022, total debt of $2.1 billion, and cash of $14.9 million. The net debt to adjusted EBITDA ratio was 1.32 and the debt to capital ratio was 0.37. EBITDA covers the interest expense a comfortable 17.7 times. The company has a BBB investment grade credit rating on senior unsecured debt from Egan-Jones.
Cash flow from operations amounted to $787 million over the past 12 months while capital expenditures were $342 million leaving a sound free cash flow balance of $444 million. We note that free cash is consistently positive, which reflects the operational efficiency and profitable business operations.
The company regularly buys its own shares in the market. The current regulatory approval allows the firm to buy up to seven million of its common shares until November 1 - this may be lifted to 8.8 million (or 10% of the issued shares) subject to regulatory approval. Up to the end of June, the company has already bought and canceled 62% of the allowable total.
The Chairman of the Board and Chief Executive Officer is Alain Bedard. He joined the company that eventually became TFI in 1996 and is also a substantial shareholder with 5% of the common shares. Other major shareholders are Capital Research Global Investors (10%), Capital International (10%), the Lino Saputo family (5.0%), Vanguard, and Fidelity.
The CEO is 68 years old and had a long and distinguished career with the company. In 2019, a CEO succession plan was developed by the Board although the company stated in early 2022 that they do not expect the CEO to retire in the near term. Of the 10 Board members, nine are considered to be independent. With the Chair and CEO roles combined, the independent oversight role of the Board becomes more challenging. Executives earn a base salary, short-term performance bonuses, and long-term share-based incentives.
Short-term incentives for the CEO are mainly based on the achievement of financial objectives including revenue, EBITDA, free cash flow, and earnings per share targets. Long-term incentives are linked to absolute financial objectives (EBIT) and the share price performance. There seems to be an emphasis on growth and expansion with only a limited reference to profitability.
A strong performance in the first half of 2022
In the first six months of 2022, revenues increased by 55%, mostly because of the acquisition of the ground freight operations of UPS and higher fuel surcharges. Organic revenue growth was about 2%. Adjusted EBITDA and net income also jumped mainly as a result of the UPS acquisition while diluted earnings per share increased by 94%.
The adjusted EBITDA margin increased by almost 3% to 19.9% while the adjusted operating ratio (operating expenses/revenues - lower is better) improved to 85.8%. Free cash flow was healthy at $401 million, slightly below the first six months of 2021.
Synergies and improving operational efficiencies in the acquired UPS ground freight operations are starting to emerge. But compared to similar Canadian Less-Than-Truckload operations, there is further room for improvement. In the most recent results announcement management also noted that TFI continues to have material synergy opportunities related to UPS Freight acquisition and that the integration is progressing as planned.
Consensus estimates now indicate earnings per share of $7.08 for the full year, which will be 35% higher than in 2021, followed by 4% growth in 2023 and 18% in 2024. However, the consensus full-year estimate is likely to increase as more analysts update their models following the strong second-quarter results.
The company pays a regular dividend which amounted to $0.54 per share in the first six months; 17.4% higher than last year.
Given the stock's current price and consensus estimates for the next 12 months, the company is valued on a price-to-earnings ratio of 13.5 times, an EV/EBITDA ratio of 7.8 times, and a free cash flow yield of 8.6%.
This represents a small discount to the group average and a larger discount to the valuation multiples of the industry leader UPS. As indicated above, TFI is growing faster and is almost as profitable as UPS.
Bottom line … excellent business with an attractive valuation. Despite operating in a highly competitive industry, TFI has built up a strong record of profitable growth and should be able to continue growing and expanding the business. The valuation is attractive and investors could expect a reasonable return aligned with annual profit growth over the long run. More upside is possible if the valuation multiple expands.
By Deon Vernooy, CFA, for TSI Wealth Network
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