Ahead of fourth-quarter earnings season for Canadian trucking and diversified industrial companies, RBC Dominion Securities analyst Walter Spracklin expects “visibility into the freight demand outlook” to be the focus of investors.
Seeing “mixed” signs for volumes with U.S. freight shipments declining but rail traffic rising, he warned trucking pricing was “weak,” however he sees evidence the market is “steadying, signalling we may be nearing a bottom.”
“Transportation and diversified industrial share prices were mostly higher in the quarter with performance mixed versus the index,” said Mr. Spracklin. “CJT, SJ, and WTE outperformed the S&P TSX, while MTL, TFII, and AND underperformed. CJT performed best, up 32 per cent, following a material change in the company’s fleet expansion plan, which should meaningfully pull forward the timing of the anticipated FCF inflection. SJ (up 18 per cent) and WTE (up 9 per cent) also outperformed following solid Q3 results. MTL, TFII, and AND underperformed likely due to concerns surrounding truck pricing and overall freight demand, although TFII shares were up toward the end of December following an announcement that the company is evaluating the benefits of separating into two public companies (TL and LTL/P&C/Logistics).”
“TFII and WTE are trading toward the high-end of their historical ranges – TFII in our view reflecting the potential separation of the company into two separate publicly traded entities (TL and LTL/P&C/Logistics) and WTE due to strong thermal coal demand and ongoing potash terminal conversion. SJ is trading midrange of its historical range likely resulting from U.S. infrastructure spending partly offset by peak pricing concerns. On the other hand, AND and MTL are toward the bottom of their historical valuation ranges we believe due to recessionary headwinds and the potential negative impact on freight volumes. Finally, CJT is also trading toward the bottom of its historical valuation but off recent lows due to an upcoming FCF inflection expected in the immediate term in our view.”
In a research report released Wednesday, Mr. Spracklin lowered his target for shares of TFI International Inc. (TFII-N, TFII-T) to US$155, below the US$156.50 average, from US$160, keeping an “outperform” rating, after reducing his financial expectations due to weaker truck pricing. His earnings per share estimate is now US$1.73, down from US$1.83 but above the US$1.69 average.
“Our 2023 estimate decreases to $6.24 (from $6.34), in line with consensus $6.24 and guidance for EPS of $6.00 to $6.50 .... For guidance, we expect management to guide to 2024 EPS of between $7.50 and $8.00, which we believe reflects uncertainty surrounding pricing and demand and which we would view as neutral to sentiment given consensus sits at $7.78,” he added.
“Specific to TFII, the potential separation of the company into two separate publicly traded entities will be of interest in our view.”
Mr. Spracklin sees two “best-positioned” stocks heading into earnings season:
* Cargojet Inc. (CJT-T) with an “outperform” rating and $184 target. Average: $143.83.
Our Q4 estimate remains unchanged at $80-million, relatively in-line with consensus $82-million. While indication from FedEx is that overnight volumes were under pressure in the quarter, Cargojet this week disclosed that its Q4 results were in line with its expectations,” said Mr. Spracklin.
* Stella-Jones Inc. (SJ-T) with an “outperform” rating and $91 target. Average: $88.43.
“Our Q4 estimate remains at $123-million, above consensus $117-million,” he said. “Our 2025 estimate of $632-million is unchanged and ahead of implied EBITDA guidance of more than $576-million, which we continue to view as incorporating conservatism reflecting upside potential related to the U.S. infrastructure bill.”