Our view: TFII delivered a strong Q3 result, with EBITDA better than consensus and our estimate. The company also increased guidance, but we note that the guide implies a Q4 well below street expectations, which we believe is driving today's share price weakness. Nevertheless, we remain positive on the longer term opportunity and expect TForce Freight integration to continue successfully on the back of tight capacity and strong demand. Moreover, we believe that TFII is well positioned for further M&A, and expect activity to pick-up in 2022. Price Target increases to $124, from $117, on higher target multiple; reiterate OP.
Key points:
Q3/21 results above consensus, 17% dividend hike. TFII reported adjusted EBITDA of $296MM, above consensus $291MM (RBC: $290MM), as strength in LTL more than offset lower than expected results in P&C and TL. Adjusted EPS came in at $1.46, above consensus $1.38 (RBC: $1.36). Moreover, mgmt announced a dividend increase to $0.27 (from $0.23) or up +17% versus our estimate for up +4%.
Guidance raise in line with prior consensus but technically implies a weak Q4. Management updated 2021 guidance for operating EPS of $4.75 to $4.85, up from prior guidance of $4.50 to $4.60. We note that the guidance was roughly in line with consensus coming into the quarter of $4.87 and reflects continued progress surrounding the UPS Freight integration. However, given the Q3 beat, the updated guidance implies a Q4 EPS that is below. Nevertheless, we view the likelihood of upside to guidance as high reflecting mgmt conservatism. Mgmt also raised FCF guidance to $675MM to $700MM (from $550MM to $575MM).
M&A likely in 2022. We continue to expect M&A activity to be pulled forward reflecting continued success in the TForce Freight integration. Given that the remaining 40% of TForce Freight is expected be re-priced by H1/22, we believe focus will shift to M&A in the second half of next year. We view TFII’s balance sheet as well positioned for another transformative deal by year-end, and we continue to view M&A as a key catalyst.
Our year estimates unchanged. Our 2021 EPS estimate moves up to $4.93 (excl. CEWS) or $5.02 (incl. CEWS) on the back of better than expected Q3 results. Our updated estimates are above guidance, which includes CEWS, for EPS of $4.75 to $4.85, reflecting management commentary suggesting conservatism. Our out year assumptions remain unchanged and continue to factor in a strong pricing and demand environment, as well as successful UPS Freight integration. Accordingly, our 2022 and 2023 estimates are unchanged at $6.08 and $6.90, respectively.
Our view. TFII continues to deliver on TForce Freight targets and is seeing its other segments benefit from tight capacity conditions. We expect tight capacity to continue into next year and view TFII as a key beneficiary of current trends. With cash flow strong and leverage low (<2x), we expect M&A to accelerate and are taking higher our multiple to 18x (from 17x). Target price to $124, from $117. Reiterate OP.