Take a pass on TFI International right now, Echelon Wealth says

Trucking company and logistics player TFI International Inc. (TFI International Stock Quote, Chart, News: TSX:TFII) had a good Q4 of 2017, says analyst Ralph Garcea of Echelon Wealth Partners, however weak margins and unstable industry conditions in the United States translate into a “Hold” rating and $35.00 target price.

Montreal-based TFI International released its fourth quarter and full-year 2017 results this week, boasting a two per cent increase in revenue before fuel surcharge from its continuing operations and a net income from continuing operations of $120.2 million in the quarter.

President and CEO Alain Bédard said that Q4 capped a year of “continued strong progress” for TFI, which runs the largest trucking fleet in Canada along with operations in the US.

“Organic growth in operating income was strong in 2017 excluding our US truckload operations,” said Bédard, in a press release. “Throughout the year, we generated strong cash flow, which we used to reduce our debt and return excess cash to shareholders through dividends and share buybacks.”

Garcea attributes EBITDA weakness in the quarter ($132 million) to the company’s LTL (Less-than-Truckload) division, which experienced weak margins due to overcapacity issues. “We are pleased with Truckload (TL) performance in the quarter at $480M (up 5% y/y), however, margins are still lacking (14% vs. 15% y/y and 14% q/q),” says the analyst in a note to clients on Wednesday.

“Although management believes its 2018 EBITDA target of ~$600M is still attainable, we remain cautiously optimistic on TFI and patiently wait for US TL conditions to normalise, which we believe is under way, at which time we would be more constructive on our estimates and rating,” says the analyst.

Garcea reports that TFII is currently trading at a 2018 EV/Sales, EV/EBITDA, and P/E multiple of 0.9x, 7.3x, and 13.1x, respectively, versus its global freight comparables of 1.2x, 8.5x, and 17.6x, respectively.

The analyst says that TFI’s dividend policy of paying out 20 to 25 per cent of its free cash flow, along with an active NCIB and a prudent M&A strategy “bodes well” for long-term shareholders.

The analyst maintains his “Hold” rating and discounted cash flow-based target price of $35.00, representing a 19 per cent return at time of publication.