While its results fell “modestly” below expectations and freight market dynamics “remain soft,” National Bank Financial analyst Cameron Doerksen thinks the first quarter for TFI International Inc. feels “like a trough,” leading him to raise his recommendation for its shares to “outperform” from “sector perform” previously.
“We still believe a better freight market backdrop could materialize later in 2024 and into 2025,” he said. “We also see earnings growth tailwinds for the company in 2024 and 2025 driven by margin improvement in the U.S. LTL [less-than-truckload] segment and from the integration of recently acquired Daseke. Finally, as we detailed in our Q1/24 preview), there is strong upside potential for the stock if the company moves forward with the split into two separate publicly traded companies at some point in late 2025 or early 2026.
“TFII management introduced 2024 guidance for EPS of $6.75-$7.00, which comes in below our prior forecast of $7.52 and the consensus of $7.31 so we expect downward estimate revisions following the Q1 print (we also lowered our forecast).”
Shares of the Montreal-based company slipped 2.3 per cent on Friday after reported total revenue for the quarter of US$1.871-billion, falling below both Mr. Doerksen’s US$1.926-billion estimate as well as the consensus projection of $1.902-billion. Adjusted earnings per share of US$1.24 was also weaker than anticipated (US$1.34 and US$1.26, respectively).
While TFI’s management also introduced full-year guidance of US$6.75-US$7 that fell short of forecasts (US$7.52 and US$7.31), Mr. Doerksen thinks LTL trends are “starting to look more positive” and expects a better second half of the year for freight market.
“A key component of management’s strategy to improve profitability in the TForce Freight U.S. LTL segment is to attract higher quality revenue by improving customer service and increasing weight per shipment,” said Mr. Doerksen. “Q1 results demonstrated some positive trends on that front as U.S. LTL revenue was up 5.2 per cent year-over-year with shipments down 5.7 per cent, but revenue per shipment ex-fuel up a solid 11.5 per cent. Average weight per shipment was also up 13.7 per cent year-over-year.”
“TFII is targeting $825-$900 million in free cash flow this year, which is a solid performance in a tough market. With the recent acquisition of Daseke completed earlier this month, the capital deployment focus for the company will be on debt reduction ($500-$600 million planned) that will bring leverage down to 1.8 times by year-end based on our forecast, but management also indicates it will still be active with tuck-in acquisitions and opportunistically with its NCIB.”
The analyst trimmed his target for TFI shares to $217 (Canadian) from $222 after “modest” reductions to his forecast, however he thinks its valuation “looks more interesting” following recent share price depreciation. The average target on the Street is $198.63.
“TFII shares are down 18 per cent from their recent high and are now trading at 19.5 times our updated 2024 EPS estimate (based on trough-like market conditions), which is below the weighted average peers (based on TFII’s revenue exposure by segment) of 25.2 times,” said Mr. Doerksen.
Elsewhere, other analysts making changes include:
* Desjardins Securities’ Benoit Poirier to $208 from $216 with a “buy” rating.
“While TFII’s conference call presented some positive commentary on the progress of service improvements and the LTL flywheel, we believe its EPS guidance disappointed investors. Consensus for 2024 and 2025 likely has more downward than upward bias given the reality of the freight backdrop. That said, the impressive FCF outlook despite a depressed year for earnings reinforces our thesis that TFII is a long-term FCF compounder,” said Mr. Poirier.
* Scotia’s Konark Gupta to $230 from $235 with a “sector outperform” rating.
“We are not surprised by the market reaction [Friday], despite the stock’s more than 10-per-cent pullback heading into the earnings,” he said. “Q1 didn’t turn out to be as good as expected (see our first look) while debut guidance (mainly EPS) also fell short. However, the silver lining is that U.S. LTL is finally showing meaningful improvement as the TL and smaller P&C segments are weighing on EPS. Further, FCF remains strong and is guided to increase this year, implying an attractive high single-digit FCF yield. We remain convinced that TFII’s self-help levers should drive an EPS rebound this year, followed by accelerated growth in 2025. We have adjusted our estimates to align with the low end of guidance, which drives our target down ... We maintain our Sector Outperform rating, expecting a 2H rebound, M&A, buybacks, and TL spin-off to be catalysts over the next two years.”
* CIBC’s Kevin Chiang to US$172 from US$175 with an “outperformer” rating.