TFI International Stock Report

TFI International Inc. (Formerly TransForce Inc.)

Since 2010 the revenue per share growth (red line) has been strong and steady and with a higher growth in 2017 due to a large acquisition near the end of 2016. The adjusted earnings per share (purple line) has been very strong and relatively steady since 2009. GAAP earnings were boosted by a large gain on the sale of a division in 2016 and were below adjusted earnings in 2017 due to a write-off of goodwill. Book value per share was flat in 2015 due to share buy backs but spiked in 2016 due the sale of a division at a large gain and was flat in 2017 despite the earnings due to the write-off and due to share buy-backs.

TFI International Inc. (TFII, Toronto)
RESEARCH SUMMARY  
Report Author(s): InvestorsFriend Inc. Analyst(s)
Author(s)’ disclosure of share ownership:  The Author(s) hold shares
Based on financials from: Dec ’17 Y.E. + Q1 ’18
Last updated: 09-Jun-18
Share Price At Date of Last Update:  $                             41.30
Currency: $ Canadian
Generic Rating (This rating does not consider the circumstances of any individual investor and is therefore not specific advice for any individual): (lower) Buy rated at $41.30
SUMMARY AND RATING:  The graph of revenues per share (red line) shows  relatively strong and steady growth since 2010. The adjusted earnings per share growth (purple line) has been very strong and relatively steady since 2009 but had declined significantly prior to that. The Value ratios would indicate a (lower) Buy rating. Management quality is very strong. The insider trading signal is weak as only the CEO was active in the market and is moderately negative as he was selling but that was after excercising share rights. Executive compensation does not seem excessive, although the CEO is very well compensated.  The long-term outlook seems good and the company seems optimistic about the short term.  Note that it faces a “tough comparable” in regards to earnings for Q2. It does not appear to have strong competitive or cost advantages other than scale and its excellent management ability. The stock recently surged after a strong Q1. But that was based mostly on cost cutting and was in comparison to a weak Q1 in 2017. Overall we would rate this  a (lower) Buy at $41.30. It’s a very well managed company and is worth considering especailly on dips.
LONG TERM VALUE CREATION: The long-term value creation is strong given that in addition to paying substantial dividends and buying back shares, TFI has about $1.00 of book retained earnings for each dollar of original share capital. With a price to book ratio of abouit 2.6, it has turned each dollar of share capital into about $5.20 of market value. We don’t know the average length of time that it has held each dollar of share capital but that number is likely not much longer than ten years.
DESCRIPTION OF BUSINESS: (last updated Q1 2018) TransForce is a trucking and delivery company. TransForce is focused on acquisitions as well as very efficiently managing its operations. It has the largest trucking fleet in Canada and a presence in the United States. It has 270 terminals/facilities in Canada and 103 in the United States and 12 terminals in Mexico. It has 16,847 employees and another  8,583 independent contractors (presumably mostly driver/owners of trucks). It owns 6,951 power units and 24,164 trailers. The average age of the tractors in the Truckload division is only 2.5 years in the U.S. and 3.1 years in Canada  and the trailers 6.5 years in the U.S. and 5.4 years Canada. Based only on the top 54% of its customers, its customer categories are Retail 31%, Manufactured goods 15%, Energy 6%,  Services 5%, Automotive 6%, Food and Beverage 6%, Forest products 4%. The breakout of revenue by continuing operations segments in Q1 2018  was Package and Courier 13%, Less-Than-Truckload 20% , Truckload 47% , and Logistics and Last Mile 20%. Revenues in 2017 were 56% from Canada and 43% from the U.S and less that 0.5% from Mexico.
ECONOMICS OF THE BUSINESS: The economics appear to be strong. In the 12 months ended Q1 2017, its adjusted ROE (based on return on ending equity in this case) was very strong at 15.1%. Trailing year net profit was 4.7% of revenue. This was levered up very slightly to a profit of 5.8% of the ending asset level as revenues were 1.23 times larger than assets. This was further leveraged up to 15.2% of ending equity as assets are 2.6 times larger than equity.
RISKS: See annual report for a full discussion of risks. Earnings fluctuate with the state of the economy.
INSIDER TRADING / INSIDER HOLDING: Checking insider trading from December 1, 2017 to June 19, 2018, only the founder / CEO was active. After exercising rights, the CEO sold 50,000 at $31.79 on December 15 and a further 34,300 shares at $32.65 on December 28 , 40,000 in March at $33.3 and 80,000 in May at $37 but retained 4.0 million shares. In March he did buy tiny amounts of shares 251 and 150 at $32.30 for two indirect accounts .  The company itself bought back shares in at prices from $31.50to $37 and then just a small number at up to $39. At the now higher price of $41, the insider trading signal is weak (based on only the CEO) but could be considered somewhat negative. Overall, the insider ownership is relatively modest.
WARREN BUFFETT’s CRITERIA: Buffett indicates that all investments must pass four key tests: the business is  simple to understand and predict (pass given that trucking is relatively simple business) , has favorable long-term economics due to cost advantages or superior brand power (marginal pass – perhaps its relatively high ROE is evidence of some advantage of scale), apparently able and trustworthy management (pass given the profit history and the general tone of its reports), a sensible price – below its intrinsic value (pass given its value ratios), Other criteria that have been attributed to Buffett include: a low  debt ratio (pass), good recent profit history (pass) little chance of permanent loss of the investors capital (pass) a low level of maintenance type capital spending required to maintain existing operations excluding growth (marginal pass)
MOST RECENT EARNINGS AND SALES TREND:  Adjusted earnings per share growth in 2017 was only 2%. Earnings per share growth in 2016 was 12%. Adjusted earnings per share growth in the past four quarters, beginning with the most recent (Q1 2018) was 56%, 4%, minus 12%, and 21%. Revenues per share in the past four quarters, beginning with the most recent, were down 9%, up 14%, up 21%, and up 32%. Revenue per share growth in 2017 was 10%  Overall, the recent trend is very positive except for the latest quarter revenue per share decline and the Q3 2017 decline in earnings per share which was  driven partly by transition expenses that the company does not adjust for.
INDUSTRY SPECIFIC STATISTICS: Organic
Earnings Growth Scenario and Justifiable P/E: With a dividend yield of 2.0% and a payout ratio of 35% of adjusted earnings , growth of about 5% annually  would justify the recent P/E of about 17.
VALUE Ratios: Analysed at a price of $41.30. The Price to book ratio is probably not unreasonable at 2.62 but note that the company itself has paid very significant premiums in acquisitions and the  tangible book value after deducting goodwill is negative. Due to the relatively high price to book ratio, the dividend yield is modest at 2.0 despite a payout ratio of 35% of adjusted earnings. The adjusted P/E ratio is about neutral in attractiveness at 17.3. The ROE is quite attractive at 15.1% and that is in spite of the premiums paid in acquisitions and in spite of the equity growth due to a major gain on a sale of a division in early 2016. The adjusted earnings per share have grown at a compounded average rate of 8.5% in the past five calendar/fiscal years and 8.6% in the past ten years. Intrinsic value is calculated as $35.90 if earnings per share grow at 6% for five years and the P/E declines slightly to 12 and $48.86 if earnings grow at 9% annually and the P/E remains at about 17. Both estimates use a 7.0% required rate of return. Overall, the value ratios would suggest a rating of (lower) Buy.
SUPPORTING RESEARCH AND ANALYSIS  
Symbol and Exchange: TFII, Toronto
Currency: $ Canadian
Contact: 647 729-4079
Web-site: www.transforcecompany.com
INCOME AND PRICE / EARNINGS RATIO ANALYSIS  
Latest four quarters annual sales $ millions: $4,630.7
Latest four quarters annual earnings $ millions: $192.1
P/E ratio based on latest four quarters earnings: 19.7
Latest four quarters annual earnings, adjusted, $ millions: $218.0
BASIS OR SOURCE OF ADJUSTED EARNINGS: In the most recent eight quarters we used managements figure for adjusted earnings from continuing operations. For the calendar years prior to 2015, we did not have that figure but used management’s figure for adjusted earnings except that we deducted gains on dispositions (less a tax impact).
Quality of Earnings Measurement and Persistence: The adjusted earnings seem relatively reliable. Depreciation is an estimated figure and is relatively large in relation to earnings and so the earnings are relying on the accuracy and sufficient conservatism of the depreciation amount.  Depreciation does seem to be conservative as evidenced by the frequent sale of assets at a gain. Certain transition costs have not been added back in adjusted earnings. Overall the earnings appear to be conservatively stated.
P/E ratio based on latest four quarters earnings, adjusted 17.3
Latest fiscal year annual earnings: $158.0
P/E ratio based on latest fiscal year earnings: 23.9
Fiscal earnings adjusted: $192.6
P/E ratio for fiscal earnings adjusted: 19.6
Latest four quarters profit as percent of sales 4.7%
Dividend Yield: 2.0%
Price / Sales Ratio 0.82
BALANCE SHEET ITEMS  
Price to (diluted) book value ratio:                                         2.62
Balance Sheet: (last updated for Q3 2017). Assets are comprised as follows: 48% is purchased goodwill or the equivalent, 7% land and buildings, 24% rolling stock, 1% equipment) and 18% is current working capital largely trade receivables (it has no cash). The other side of the balance sheet which supports these assets is comprised as follows: 40% debt (which is mostly long term) 36% common equity, 12% current payables (which largely offset the receivables), 10% deferred income taxes and 2% provisions and other liabilities. Overall, the balance sheet appears relatively strong assuming that the goodwill is solid.
Quality of Net Assets (Book Equity Value) Measurement: About half of the assets here are purchased intangible (goodwill and the equivalent). At the time of this analysis the shares were trading at about 2.62 times book value. The company is valued for its earnings not for the value of the assets. based on earnings and frequent sales of assets at gains, the assets are worth more than book value.
Number of Diluted common shares in millions:                                  91.2
Controlling Shareholder: As of Spring 2018, no one or no fund owned more than 10% of the shares . The founder/CEO owns about 4.5% of the shares.
Market Equity Capitalization (Value) $ millions: $3,766.0
Percentage of assets supported by common equity: (remainder is debt or other liabilities) 38.3%
Interest-bearing debt as a percentage of common equity 106%
Current assets / current liabilities: 1.3
Liquidity and capital structure: The debt level is reasonable at 106% of the equity level.
RETURN ON EQUITY AND ON MARKET VALUE  
Latest four quarters adjusted (if applicable) net income return on average equity: 15.1%
Latest fiscal year adjusted (if applicable) net income return on average equity: 13.4%
Adjusted (if applicable) latest four quarters return on market capitalization: 5.8%
GROWTH RATIOS, OUTLOOK and CALCULATED INTRINSIC VALUE PER SHARE  
5 years compounded growth in sales/share 10.1%
Volatility of sales growth per share:  Relatively Steady
5 Years compounded growth in earnings/share 1.9%
5 years compounded growth in adjusted earnings per share 8.5%
Volatility of earnings growth:  Somewhat volatile
Projected current year earnings $millions: not available
Management projected price to earnings ratio: not available
Over the last ten years, has this been a truly excellent company exhibiting strong and steady growth in revenues per share and in earnings per share? Yes
Expected growth in EPS based on adjusted fiscal Return on equity times percent of earnings retained: 8.7%
More conservative estimate of compounded growth in earnings per share over the forecast period: 6.0%
More optimistic estimate of compounded growth in earnings per share over the forecast period: 9.0%
OUTLOOK FOR BUSINESS: The company appears to be optimistic at this time noting the improved American economy and its own continuing efforts to be more efficient. It does note that the less-than-truckload category suffers from industry over-capacity. The company believes it can grow in trucking to and from Mexico. It seems reasonable to forecast that the company can continue to operate profitably and to make worthwhile acquisitions. Recent acquisitions are allowing profits to grow in spite of some decreases in revenue in existing operations.
LONG TERM PREDICTABILITY: It seems reasonable to predict that the company will continue to grow its earnings over the years however its earnings are subject to year to year volatility.
Estimated present value per share: We calculate  $29.45 if adjusted earnings per share grow for 5 years at the more conservative rate of 6% and the shares can then be sold at a P/E of 12 and $40.88 if adjusted earnings per share grow at the more optimistic rate of 9% for 5 years and the shares can then be sold at a P/E of 15. Both estimates use a 6.5% required rate of return.
ADDITIONAL COMMENTS  
INDUSTRY ATTRACTIVENESS: (These comments reflect the industry and the company’s particular incumbent position within that industry segment.) Michael Porter of Harvard argues that an attractive industry is one where firms are somewhat protected from competition based on the following four tests. Has barriers to entry (marginal pass as capital is likely the largest barrier but scale is also important). No issues with powerful suppliers (pass). No issues with dependence on powerful customers (pass as the largest customer is less than 5% of revenue), No potential for substitute products (pass) No tendency to compete ruinously on price (marginal pass). Overall this industry appears to be marginally attractive to an established large incumbent.
COMPETITIVE ADVANTAGE: It likely has some competitive advantage in Canada due to scale as it is the largest trucking company in Canada. It’s not clear that it would have any special advantages in the U.S. market. They do appear to be particularly well managed and are skilled in cutting costs when needed.
COMPETITIVE POSITION: The company has the largest trucking fleet in Canada as well as a presence in the U.S. market. It is a fragmented industry.
RECENT EVENTS: The company has made one small acquisition in 2018. The company made seven small acquisitions in 2017. The company has downsized a number of existing operations by selling rolling stock and some terminals. The dividend was increased by 12% effective with the January 2017 distribution and a further 11% for the January 2018 dividend. In Q3 2017 they did a sale and lease-back transaction that netted a gain of $70.1 million before tax. In Q2 2017 they took a $130 million write-off of goodwill associated with the U.S. truck load business purchased in 2016. The write-off was due to weakness and stiff competition in that business. In Q1 2016 the company closed the sale of its Waste Management operations for $800 million resulting in a pre-tax gain of $550 million. This division represented 14% of EBIT in 2014. The company bought back about 2.7% of its shares in an auction process in 2016 at a price of $22 per share  which was the top of the range for the auction. The company then bought back an additional 3.3% of shares at prices up to $27 and then additional purchases at prices up to $37 and a few at $39. The company grew by two major acquisitions in 2014 and one in late 2016 and has also made small acquisitions each year. The company has bought back a very substantial amount of shares in each of the years 2012 through 2018. The company divested of some weaker business units in the past couple of years and booked gains on the disposals. About 10 million or about 11% was added to the share count due to convertible debt in 2014. The company is dropping lower margin customers.
ACCOUNTING AND DISCLOSURE ISSUES: We found the disclosure to be reasonably good. However the practice of presenting adjusted earnings from continuing operations troubled us in that the numbers change retroactively when it sells a division. We would have preferred an adjusted earnings figure that was not subject to retroactive change. Frequent gains on sales of assets create a situation where adjusted earnings constantly differ from GAPP earnings. Certain derivatives and hedges impact earnings. The fact that about half of the earnings are from the U.S. contributes to earnings volatility as the exchange rate changes. Like most companies, they mix purchased customer relationships with software , and the amortization of, which are both intangibles but of a vastly different nature. They are conservative in not adding back certain acquisition transition costs to adjusted earnings. The income statements has the fuel expense in the same line item as subcontract expesnes and since both of these items are large it would be preferable to show them seperately.
COMMON SHARE STRUCTURE USED: Normal, one vote per share.
MANAGEMENT QUALITY: Management quality appears to be very high. Listening to the conference call, the CEO is extremely open with his thoughts and is very knowledgeable. He knows his numbers. In addition, this management has shown excellent ability to trim costs when needed in response to revenue declines. And they have jettisoned less profitable business. It is a rare management that is willing at times to “fire” customers. It seems that don’t to waste time and energy and resouces on customers that are insufficiently profitable.
Capital Allocation Skills: This skill is particularly important for TransForce which has a stated major goal of adding value through acquisitions. It has a strong track record. (There was a write-off of some goodwill in 2017 suggesting that may have paid somewhat too much for a large acquisition in 2016 but overall the track record has been very strong.) It may have made a very wise choice in divesting certain weaker lines of business in the past few years. Its realtively recent aggressive share buy back program has apparently been a good use of capital even at a time when the company was also very active in making acquisitions. (The subsequent share price increase confirms it was a good use of capital) The move towards a more ‘asset light” approach appears to have been wise.
EXECUTIVE COMPENSATION:  In 2017 the CEO received total compensation of $7.4 million. The other four named officers were in the $0.7 to $1.5 million range. In 2016 the CEO received total compensation of $11.4 million. The other four named officers were in the $1.0 to $1.7 million range. This level of compensation is arguably not excessive or a concern given the size and success of the company. It does, however look somewhat too heavily weighted to the CEO although the CEO as the only man on the conference call is a VERY hands on CEO.
BOARD OF DIRECTORS: Warren Buffett has suggested that ideal Board members be owner-oriented, business-savvy, interested and financially independent. Here the Board consists of nine members, mostly retired executives (from banking, federal cabinet, industrial products distributor, food, and trucking) . There appears to a good level of business knowledge and the members are likely wealthy enough not to be unduly influenced by their compensation at TransForce which is about $120k per year. It is disappointing to see that four Board members (albeit two are very recent) could not be bothered to buy any shares.
Basis and Limitations of Analysis: The following applies to all the companies rated. Conclusions are based largely on achieved earnings, balance sheet strength, achieved earnings per share growth trend and industry attractiveness. We undertake a relatively detailed  analysis of the published financial statements including growth per share trends and our general view of the industry attractiveness and the company’s growth prospects. Despite this diligence our analysis is subject to limitations including the following examples. We have not met with management or discussed the long term earnings growth prospects with management. We have not reviewed all press releases. We typically have no special expertise or knowledge of the industry.
DISCLAIMER: All stock ratings presented are “generic” in nature and do not take into account the unique circumstances and risk tolerance and risk capacity of any individual. The information presented is not a recommendation for any individual to buy or sell any security. The authors are not registered investment advisors and the information presented is not to be considered investment advice to any individual. The reader should consult a registered investment advisor or registered dealer prior to making any investment decision. For ease of writing style the newsletter and articles are often written in the first person. But, legally speaking, all information and opinions are provided by InvestorsFriend Inc. and not by the authors as individuals. The author(s) of this report may have a position, as disclosed in each report. The authors’ positions may subsequently change without notice.
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