TFI International is undervalued, Echelon Wealth Partners says

Freight transportation and logistics company TFI International (TFI International News, Stock Quote, Chart TSX:TFII) performed well in its latest quarter, bringing Echelon Wealth Partners analyst Gianluca Tucci to maintain his “Buy” rating and $57.00 target in an update to clients on Friday.

The trucking sector is going through a weak period but that didn’t stop Montreal-based TFII from posting strong numbers in its Q2, ended June 30, 2019, on Thursday, including record quarterly operating income, up 21 per cent from the previous year.

“Regardless of the transportation environment, our focus will remain on creating and unlocking shareholder value, and returning excess capital to shareholders whenever possible,” wrote CEO Alain Bédard in a press release.

For the quarter, TFII’s revenue was $1,338 million compared to the consensus estimate of $1,351 million and Tucci’s forecast of $1,364 million, its adjusted EBITDA was $237 million versus the consensus $204 million and Tucci’s $208 million, while its EPS was $1.16 per share versus the Street’s $0.95 per share and Tucci’s $0.96 per share.

Tucci says that the revenue miss (two per cent) is not a concern since the margins associated with TFII’s revenue grew robustly. Tucci points out that the adjusted EBITDA strength came from all divisions but primarily from TFII’s Less-Than-Truckload division which experienced very strong margins at 22 per cent versus 14 per cent a year earlier.

Tucci notes that TFII returned a “very robust” $85 million to shareholders in its Q2 via dividends and share repurchases.

“A dividend policy of paying out 20-25 per cent of free cash flow, an active NCIB (~1 million shares per quarter), and a prudent M&A strategy bodes well for long-term shareholders,” writes Tucci.

“The North American freight environment has drastically improved in recent years, which has led to a normalization in freight rates and betterment in volumes, with management continuing to focus on improving the network efficiency in the US. We remind investors that TFII’s US TL presence via its US$558 million 2016 acquisition of XPO Logistics TL division makes it a serious player in that market – we are witnessing conditions that have trended towards a normalized balance and expect the Company to continue to deliver quality revenue as these results prove,” he writes.

Tucci has revised his estimates and is now calling for revenue and adjusted EBITDA in fiscal 2019 of $5,217 million and $855 million, respectively (was $5,295 million and $808 million, respectively). His $39.00 target represents a projected total return of 49 per cent at the time of publication. (All figures in Canadian dollars unless noted otherwise.)