TFI International Inc T.TFII

TD Notes 2

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Q4/21 Key Takeaways from Trucking Comps TD Investment Conclusion

Several of our cargo transportation comparables reported Q4/21 results recently. Approximately 90% of all comparables have reported stronger-than-expected revenue, EBITDA, and EPS. Despite this performance, share prices are still down an average of approximately 10% since the end of 2021, and are relatively flat over the past two weeks with two notable outliers being UPS (P&C) up 13% and C.H. Robinson (Logistics) down 15%. We believe that the sector's share price behaviour reflects the markets concern over downside risk to industry pricing, labour and equipment cost shortages, and inflation. While Q4/21 reports clearly acknowledge shortages of labour and equipment, the general view is that it is a manageable challenge, while the potential for trucking rate weakness from the unprecedented levels of 2021 does not seem to be a concern.

Tight capacity continued through Q4 and into early 2022. This is due to the labour and equipment shortages and other logistical challenges throughout many freight modes, combined with recovering B2B demand and persistent e-commerce strength. Overall, the results support our financial forecasts for our group of cargo transportation companies. While revenue growth is expected to moderate over the course of 2022, margins are expected to remain relatively strong (Exhibit 2). This backdrop, combined with the fact that Q4/21 equipment rates remained 40% above the 2019 average and our view of the risk to rates as the year progresses, justifies our cautious approach to the potential for a reversal of recent multiple compression.

Within the group, we prefer Cargojet based on the extent of its share price pull-back and our view that its labour challenges are manageable while future industry capacity expansion could take longer to recover than over-the-road capacity expansion. However, we consider both Andlauer Healthcare Group and TFI International as very strong companies, with the pull-backs since our recent downgrades making the upside increasingly attractive.

Pricing Outlook:

 Certain companies have increased long-term operating margin targets, a fact that reflects not only current conditions, but the view that structural changes and the willingness of shippers to accept higher rates will be sustainable.

Labour & Equipment Shortage:

• With the exception of ODFL, which increased its employee base by 20% in 2021, most comparables continue to report difficulty in securing sufficient drivers, maintenance, and warehouse employees. This is leading to inefficiencies and rising wages that are being passed through to shippers in contract renewals.

• Delays to equipment deliveries are continuing. This is leading to deferred capex and the need to operate older, less efficient units longer-than-anticipated. We believe that the pending wave of new equipment and the margin benefits that they provide will help mitigate margin pressure that results from rate/pricing pressure in 2022.