TFI International Stock Report

TFI International Inc. 

This chart speaks for itself showing very strong growth.

TFI International Inc. (TFII, Toronto)  
Report Author(s): InvestorsFriend Inc. Analyst(s)
Author(s)’ disclosure of share ownership:  The Author(s) hold shares
Based on financials from: Dec ’22 Y.E. +Q1 ’23
Last updated: May 9, 2023
Share Price At Date of Last Update:  $                                141.57
Currency: $ Canadian
Generic Rating (This rating does not consider the circumstances of any individual investor and is therefore not specific advice for any individual): Buy at $141.57
Qualifies as a stock that could be bought with confidence to hold for 20 years? Yes
Has Wonderful Economics? Yes, despite price competition
Has Excellent and Trustworthy Management? Yes!
Likely to grow earnings per share at an attractive rate over the next decade? Yes
Positive near-term earnings outlook? No, due to current slow down
Valuation? Attractively valued
SUMMARY AND RATING:  The graph of revenues per share (red line) shows strong and steady growth. The adjusted earnings per share growth (purple line) has been very strong indeed. The Value ratios (looking backwards) would easily support a (higher)Buy rating. Management quality is very strong. The insider trading signal is neutral. Executive compensation does not seem excessive, although the CEO is very well compensated.  The outlook for 2023 however is for an probable modest earnings decline due to a divestiture and weaker freight levels. The long-term outlook seems good.  It does not appear to have strong competitive or cost advantages other than scale and its very excellent management ability. The economics of the business are strong despite being subject to stiff price competition. It is possible that Amazon’s move into trucking could harm their business somewhat. Overall we would rate this  a Buy at $141.57. Due to the probable earnings decline in 2023 it would be best to accumulate this more slowly and not rush in.
MACRO ENVIRONMENT:  Sharply higher interest rates and a probable looming recession are headwinds. Volumes are down in the trucking industry in 2023 compared to 2022.
LONG TERM VALUE CREATION: (Updated March 13, 2022) The long-term value creation is exceptionally strong.
DESCRIPTION OF BUSINESS: (last updated Q3 and Q4 2021) TFI International is a trucking and delivery company with total annual revenues of over $9 billion dollars. TFI is focused on acquisitions as well as very efficiently managing its operations. Since 1998, the company has acquired more than 180 companies. Acquired companies continue to operate under their same names and management teams in a decentralised structure.  It has the largest trucking fleet in Canada and a presence in the United States. It has 233 terminals/facilities in Canada and 316 in the United States and 12 terminals in Mexico. It has 28,900 employees and another  9,857 independent contractors (presumably mostly driver/owners of trucks). It owns 13,433 power units (tractors) and 48,612 trailers. The breakout of revenue by segment for 2021  was Package and Courier (which subject to check operates only in Canada) 9%, Less-Than-Truckload 37% , Truckload 29% , and Logistics and Last Mile 25%. Revenues in 2021 were 33% from Canada and 67% from the U.S and 0.3% from Mexico. TFI has become primarily a U.S. operator with its recent large UPS acquisition.
ECONOMICS OF THE BUSINESS: The economics appear to be VERY strong.  TFI’s success in managing costs contributes to its strong overall economics.
RISKS: See annual report for a full discussion of risks. Earnings fluctuate with the state of the economy. Some of the important risks include accident liabilities, competition based on price and competition for drivers.
INSIDER TRADING / INSIDER HOLDING: Checking insider trading from May 1, 2022 to May 9, 2023: The founder and CEO exercised options and sold several hundred thousand shares regularly most months but he maintained his ownership and increased slightly to 4.35 million shares. There were several insiders exercising options and selling and some outright share sales with one sale at $173. The company itself was buying back shares fairly regularly through the year ultimately paying as much as $159 (but mostly lower)  which is a vote of confidence. Overall with a share price decline to about $142, the insider selling signal is neutral.
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 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:  The recent growth trend turned negative in the latest quarter after a long period of stellar gains. The adjusted earnings pers share gain in 2022 was 53% but revenue per share growth was just 6%. The adjusted earnings per share growth in 2021 was 59% and the revenue per share growth was 83%!
Earnings Growth Scenario and Justifiable P/E: With a dividend yield of 1.3% and a payout ratio of just 18% of adjusted earnings, the stock is pricing in growth of only about 5% annually at its current P/E of about 14. It’s historic growth has been far higher.
VALUE Ratios: Analysed at a price of $118.33. The Price to book ratio appears somewhat high at 3.5 and note that the company itself has paid very significant premiums in acquisitions. But that may be well justified by the high ROE. Due to the relatively high price to book ratio, and the low 18% payout ratio, the dividend yield is quite modest at 1.3% despite recent dividend increases. The adjusted P/E ratio is neutral in attractiveness at 17.4. The ROE is exceptionally strong at 29% and that is in spite of the premiums paid in acquisitions and in spite of the impact of the pandemic. The adjusted earnings per share have grown at a compounded average rate of 40% in the past five calendar/fiscal years. Intrinsic value is calculated as $144 if earnings per share grow at 5% for five years and the P/ E  remains at 14 (very conservative) and $208 if earnings grow at 9% annually and the P/E increases back to 17. Both estimates use a 7.0% required rate of return. Overall, the value ratios would easily support  a rating of (higher) Buy – but note the potential for an earnings decline in 2023.
TAXATION: Nothing Unusual.  
Symbol and Exchange: TFII, Toronto
Currency: $ Canadian
Contact: 647 729-4079
Latest four quarters annual sales $ millions: $11,289.7
Latest four quarters annual earnings $ millions: $1,072.2
P/E ratio based on latest four quarters earnings: 11.7
Latest four quarters annual earnings, adjusted, $ millions: $940.4
BASIS OR SOURCE OF ADJUSTED EARNINGS: With a few exceptions we used managements figure for adjusted earnings from continuing operations. In 2020 we deducted the after-tax benefit of the Canada Emergency Wage Subsidy because there was no indication that the money was used to keep people working. It appears that in 2017 management had not adjusted for gains on asset sales but started to do so in 2018. 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 and adjusted earnings appear to be conservatively stated. And we deducted the after-tax benefit  of the Canada Emergency Wage Subsidy so that it would not inflate earnings.
P/E ratio based on latest four quarters earnings, adjusted 13.4
Latest fiscal year annual earnings: $1,121.0
P/E ratio based on latest fiscal year earnings: 11.2
Fiscal earnings adjusted: $996.3
P/E ratio for fiscal earnings adjusted: 12.6
Latest four quarters profit as percent of sales 8.3%
Dividend Yield: 1.3%
Price / Sales Ratio 1.11
Price to (diluted) book value ratio: 3.56
Balance Sheet: (last updated for Q3 2020). Assets are comprised as follows: 41% is purchased goodwill or the equivalent, 21% is rolling stock (trucks and trailers) 6% is land and buildings, 1% is equipment) and 22% is current working capital most of which is trade receivables and it currently has a large cash holding and 9% of assets are capitalised leases. The other side of the balance sheet which supports these assets is comprised as follows: 26% debt, 46% common equity, 11% current payables, 9% capitalised lease liabilities, 6% deferred income taxes,  and 2% provisions and other liabilities. Overall, the balance sheet appears relatively strong assuming that the goodwill is solid which the 17% ROE indicates is very much the case. Debt is relatively modest in relation to earnings and cash flow.
Quality of Net Assets (Book Equity Value) Measurement: (Updated Q3 2020) About 41% of the assets here are purchased intangible (goodwill and the equivalent). At the time of this analysis the shares were trading at about 2.7 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:                                       86.6
Controlling Shareholder: As of Spring 2019, no one or no fund owned more than 10% of the shares . The long-time CEO owns about 5% of the shares.
Market Equity Capitalization (Value) $ millions: $12,257.4
Percentage of assets supported by common equity: (remainder is debt or other liabilities) 46.0%
Interest-bearing debt as a percentage of common equity 51%
Current assets / current liabilities: 1.3
Liquidity and capital structure: The debt level is relatively modest at 51% of the book equity level and in relation to earnings and cash flow.
Latest four quarters adjusted (if applicable) net income return on average equity: 28.7%
Latest fiscal year adjusted (if applicable) net income return on average equity: 31.2%
Adjusted (if applicable) latest four quarters return on market capitalization: 7.7%
5 years compounded growth in sales/share 16.5%
Volatility of sales growth per share:   Steady Growth
5 Years compounded growth in earnings/share 49.1%
5 years compounded growth in adjusted earnings per share 40.0%
Volatility of earnings growth:  Steady Growth
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 (adjusted)  earnings per share? Yes
Expected growth in EPS based on adjusted fiscal Return on equity times percent of earnings retained: 25.8%
More conservative estimate of compounded growth in earnings per share over the forecast period: 5.0%
More optimistic estimate of compounded growth in earnings per share over the forecast period: 9.0%
OUTLOOK AND AMBITIONS FOR BUSINESS:  The outlook appears to be for a modest earnings decline in 2023 due to a divestiture made in 2022 and due to lower volumes in the trucking industry and a potential recession.
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  $144 if adjusted earnings per share grow for 5 years at the more (very?) conservative rate of 6% and the shares can then be sold at a P/E of 14 and $208 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 17. Note that these values assume that the P/E ratio increases from the current low level of 10. Both estimates use a 7.0% required rate of return.
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 as the industry does compete on price). Overall this industry appears to be marginally attractive to an established large incumbent. It may be attractive for the lowest cost incumbents.
COMPETITIVE ADVANTAGE: The company indicates that competitors compete primarily on price and reliable service. Therefore cost management and scale are presumably very important.  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 significant presence in the U.S. market. It is a fragmented industry.
RECENT EVENTS: The company continues to make fairly numerous acquisitions for growth.
ACCOUNTING AND DISCLOSURE ISSUES: A recent change to reporting in U.S. dollars was warranted but complicates comparisons to the past results. Some required accounting changes a few years ago to revenue recognition and lease accounting have affected the comparability of earnings. 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. They may have been aggressive in not deducting the Canada Emergency Wage Subsidy in adjusted earnings given it may have amounted to a windfall. 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 expenses and since both of these items are large it would be preferable to show them separately.
COMMON SHARE STRUCTURE USED: Normal, one vote per share.
MANAGEMENT QUALITY: The chairman and CEO, Alain Bedard has led the company since 1996. Management quality appears to be extremely 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 they don’t to waste time and energy and resources on customers that are insufficiently profitable. We were however surprised to hear that he would base getting into or out of certain leases on the accounting rules, when the underlying economics would be the same either way.
Capital Allocation Skills: This skill is particularly important for TFI which has a stated major goal of adding value through acquisitions. It has a very strong track record. It may have made a very wise choice in divesting certain weaker lines of business  several years ago. It has made some extremely good acquisitions and particularly the ground operations of UPS.  Its 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 move towards a more “asset light” approach appears to have been wise.
EXECUTIVE COMPENSATION:  In 2019 the CEO received total compensation of $10.8 million. The other four named officers were in the $1.1 to $1.1 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 ten 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 TFI which is modest at about $120k per year. It is disappointing to see that five Board members (albeit four are very recent directors) could not be bothered to buy any shares. They all receive and hold deferred share units.
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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