Q3/22 Cargo Transportation (road & air) Preview TD Investment Conclusion
Our cargo transportation group begins reporting Q3/22 on October 20. We believe that the resiliency of contract pricing to spot market pressure, acquisitions, capacity growth and a focus on profitable freight will lead to strong y/y EBITDA and EPS growth (Exhibit 1). Our estimates are slightly below consensus, with the exception of Cargojet for which we are in-line. Due to the equity market focus on risk related to economic weakening, its potential impact on consumer spending driven volume, and the ongoing push to expand the supply of ground and cargo transportation capacity, we believe that share-price responses to Q3/22 results will be short-lived, and that sentiment will quickly return to a focus on macro-economic data.
We are making immaterial adjustments to our forecasts (Exhibit 2) to reflect updated fuel, currency, industry data, and other minor modelling adjustments. The net impact of the updates are immaterial to our view of all stocks. Cargojet remains our top pick in the group due to the nature of its customer agreements, secular trends in dedicated air cargo, and the extent of the pull-back in its valuation.
Cargojet has the greatest upside to our 12-month target, and is expected to benefit from strong industry characteristics for dedicated air cargo companies, its capacity expansion plans, and recent DHL agreement. We forecast a 22% y/y increase in EBITDA, driven by continued strength in e-commerce demand and new ACMI revenue with DHL.
TFI International forecast growth in Q3/22 is due to a reduction in unprofitable U.S. LTL contracts, continued P&C margin expansion momentum, and the ongoing benefit of the significant step-down in Canada TL and Specialized operating ratios reported in Q2/22. We believe that TFI's margin expansion opportunities in U.S. LTL and its focus on profitable cargo will limit the downside to earnings that we expect in the coming quarters as a result of broader industry volume and pricing pressures.
Mullen Group forecast growth in Q3/22 is due to management's commitment to increasing contract rates where possible, contributions from acquisitions, and growth from its Specialized segment. In our view, the company's earnings potential beyond our anticipated contraction in 2023, sustainable dividend yield, and focus on profitability make it an attractive long-term investment, notwithstanding the potential for short-term volatility.
Andlauer Healthcare Q3/22 forecast growth is due to the acquisition of Skelton USA, Boyle Transportation, and LSU. In addition, we forecast 12% organic revenue growth, below Q2 growth, but still a strong result that reflects the value in the company's revenue profile in the current environment of uncertainty. We believe that AHG's strong franchise and the characteristics of the healthcare transportation industry should provide protection from the pricing and volume pressures that we anticipate will gradually impact other trucking companies.