Ahead of earnings season for Canadian transportation companies, RBC Dominion Securities analyst Walter Spracklin sees “increasing likelihood of a freight recession.”
“Canadian economic activity expanded in March posting its highest level since the [PMI] survey was launched,” he said. “We attribute this to a reopening of the Canadian economy post COVID-19. On the other hand, U truck pricing and freight volumes are beginning to slide, which suggests a potential slow-down in freight activity and which would represent a headwind to revenues at the freight transportation companies in our coverage. While data is mixed, we are taking a more pessimistic view, and increasingly expect consumer spend to shift away from goods and into services, thereby potentially impacting freight volumes at the companies within our coverage.”
Though he largely maintained his financial estimates in a research report released Wednesday, Mr. Spracklin expects his view of the sector’s near-term future, including “potential recessionary headwinds,” to overshadow results, particularly for TFI International Inc.
“Our Q1 estimate remains unchanged at $1.33 (cons. $1.30) but we point to potential upside resulting from robust demand and pricing conditions in January and February,” he said. “Read-throughs from U.S. truckers highlighted a record operating environment early in the year. However, we expect focus into the quarter to remain on the outlook, which is becoming increasingly uncertain due to decreasing freight volumes and truck pricing.”
Accordingly, after lowering his target multiple for Montreal-based company to better reflect the potential turbulence, he cut his target for TFI shares to US$97 from US$125 with an “outperform” rating. The average is US$127.80.
“Our target multiple is in line with peers and reflects solid operational performance. We continue to be impressed by management’s execution,” he said.