CIBCHave a US$115.00 target. GLTA
EQUITY RESEARCH
November 10, 2022 Earnings Update
TFI INTERNATIONAL INC.
Key Takeaways From Investor Day
Our Conclusion
TFII held its inaugural Investor Day which provided us with more colour on the company’s operating philosophy, culture and financial KPIs. While TFII did not release any long-term financial targets, based on its growth formula, there is a path to the company more than doubling its EPS over the next five years. While TFII is not immune to recession, we believe its earnings levers provide it with a higher level of insulation versus traditional freight companies. We expect TFII to pull on those levers to navigate a more uncertain economic environment in the near term, while creating longer-term value. Maintain Outperformer rating and $115 price target.
Key Points
U.S. LTL – More Colour On The Path To An 80%-85% OR: TFII
highlighted the three main hurdles today in achieving an 80%-85% OR,
having already added 10 points to margins in the first year of owning UPSF. The issues TFII needs to address are its line haul costs, people
management, and equipment costs. On a positive note though, TFII is in the process of rolling out the solutions to address these headwinds.
Can TFII Drive Strong Returns Without M&A?: TFII is a roll-up strategy,
which does make it difficult to determine how much of the company’s growth comes from acquisitions, organic opportunities, and operating efficiency.
TFII’s P&C segment showcases the strength of TFII’s operating culture
without M&A. Looking back the last four years, P&C revenue has grown at a CAGR of 3.5%, but its operating income has increased by 19.3%, FCF has grown by 17.9% and its ROIC sits at 31.0%. We view this as an example of TFII’s operating philosophy and what it looks to instill in its acquired companies.
M&A Opportunities Across The Platform: It was clear from each of the
presenters that M&A was a key driver of future growth and the pipeline of
opportunities are deep. We heard a rationale as to what drives TFII’s M&A strategy – the goal is to expand its reach and/or increase density. The company also laid out the playbook on how it captures synergies.
Financial Upside: If we take a simplistic view and assume annual organic
growth of ~2.5% (a proxy for GDP growth) over the next five years, assume the cycle average ORs, assume ~$300MM in tuck-ins generating 20% ROIC, and 5% of shares repurchased every year, we get ~$17/share in EPS. There is conservatism in here as we are not building in any large acquisitions (which is why we assume a more active NCIB) and some of the segment ORs today are below the cycle average. Applying a cycle-average trucking multiple of 17x to this forward EPS implies an equity value per share of $288. Based on where TFII’s shares closed, this reflects a 23% CAGR before dividends.