Our view: TFII reported last night that TForce Freight (previously UPS Ground Freight) is expected to report an adjusted operating ratio below 95% during Q2, which is meaningfully better than the 96% to 97% O/R that was expected to be achieved within one year. In other words, margin expansion is not only coming in better than expected, it’s also coming almost a full year sooner than expected. On the back of this pre-release, we raise our estimates, pull forward our valuation year, and increase our target multiple to better reflect the early success. We raise our price target to $107 from $101 and reiterate our Outperform rating.
Key points:
TFII issues positive pre-release. TFII announced last night that it expects TForce Freight to report a Q2 adjusted O/R below 95%, materially better than our prior 99.5%, which had been based on management’s guidance of a more gradual improvement. We note that the better than expected margin guide suggests meaningful upside to our (as well as consensus) near- and medium-term estimates, which we are raising to better align with the company’s disclosure. Our Q2 EPS estimate increases to $1.15 from $0.97 (cons. $0.97).
Guidance likely to move higher when TFII reports results. TFII’s prerelease suggests meaningful upside to both consensus Q2 and 2021 EPS, and we expect management to increase guidance (currently $3.80–4.00 vs. our new estimate of $4.57) when the company reports results on July 26.
Raising estimates pulling forward valuation year. We note that we adjusted our LTL margin estimates to assume that TForce Freight O/R stays flat at Q2 levels (<95% O/R) during the remainder of 2021; we then have TFII gradually driving LTL EBIT margin improvement to ~12% by 2023. As a result, our 2021 EPS estimate increases to $4.57 (consensus $4.01) from $3.95 and our 2022 estimate to $5.94 (consensus $5.04) from $4.86. We now expect successful TForce Freight integration (i.e., 90% O/R) by 2023 and accordingly pull forward our valuation year (to 2023E from 2024E). In addition, we raise our target multiple (to 17x from 16x) to better reflect the reduced uncertainty surrounding margin improvement at TForce Freight. Our price target therefore increases to $107 (from $101).
Our view on the stock. Last night’s update represented a key positive, in our view, and an early indication that margin expansion is coming in more quickly and stronger than expected. Our view is that early margin improvement was on the cost side and that there remains upside to pricing as contracts roll over into next year. We remain constructive on TFII and maintain our Outperform rating.