These are USD targets. GLTA
Foundation For Strong Earnings Growth Is In Place Our Conclusion
TFII’s idiosyncratic earnings growth levers, upcoming potential catalysts
(closing of the DSKE deal, separating the company), and undemanding
valuation make it one of our preferred names in 2024. The company’s Q4/23
results and earnings call highlight that the foundation for strong earnings
growth is in place for TFII and not dependent on making a macro call on
when the freight cycle inflects higher. We maintain our Outperformer rating
and our price target increases from $158 to $167.
Key Points
Official Guidance Will Come With Q1/24 Results But We Think Mid-$7
EPS Are Doable: TFII will provide official 2024 EPS guidance when it
reports its first quarter but noted it will start with $7. That being said, we still
see a path to ~$7.50 based on comments from President and CEO
Alain Bdard. Simplistically, if the U.S. LTL OR moves to 88%, that
represents a four-point improvement. On $1.9B of revenue, that is $76MM of
EBIT and $57MM of net income. Restructuring costs in 2023 were $30MM,
which we view as non-recurring. Lastly, in H2/23, TFII spent $514MM on
acquisitions. TFII targets a ~20% ROIC but it can take a couple of years to
fully realize these synergies. If we assume a 10% ROIC on this spend, the
roll-over benefit should be at least $30MM. As such, without making a call on
the macro environment, these three levers alone suggest an incremental
~$1.40 in EPS. TFII printed adjusted EPS of $6.18 in 2023. While the freight
environment continues to face some near-term uncertainty, our general view
is that it is bouncing at trough levels.
DSKE And Incremental M&A Levers: TFII noted that it expects to close the
DSKE transaction in Q2 and has guided to it being EPS neutral in 2024 and
at least $0.50 accretive in 2025. That being said, this may prove to be
conservative. TFII noted that the integration of DSKE should be less
challenging than that of UPSF and that its core margins are closer to TFII’s
current TL operations, with the overall margins being burdened by higher
overhead costs. This suggests TFII should be able to drive a lower OR at
DSKE faster than we had initially assumed. Simplistically, according to
consensus, DSKE is expected to generate ~$1.7B in revenue next year with
an OR of ~95%. If we assume TFII can get this OR closer to 90% within the
first year, then that would be an annualized ~$0.75 EPS accretion. Even with
this pending deal, TFII’s strong balance sheet and FCF generation position it
for additional tuck-in M&A in 2024 with the potential to deploy another
$200MM-$300MM.
Model Update: We have adjusted our estimates to reflect TFII’s outlook for
U.S. LTL and outperformance in Logistics. Our 2024E and 2025E EPS
increase to $7.57 (from $7.47) and $9.57 (from $9.42), respectively.