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May 29, 2023

Crowded Highways A Green Light For Transport Investors Trucking, Logistics Stocks Have Outperformed

by Richard Morrison

There are a variety of unusual ways to assess the prospects of an investment. Wal-Mart founder Sam Walton would measure sales volume by counting cars in his store parking lots, once even rear-ending one of his own trucks with his pickup as he counted. The car-counting indicator was later improved to scrutinize parking lots using satellite technology, now offered as a service by several companies.

As for trucks, Canadian motorists may regard the abundance of rigs on our highways as a reflection of huge shipping demand, making the transport industry an attractive investment. In fact, if there were enough drivers, there would be many more trucks on the road. In an April job vacancy report, Trucking HR Canada said there were 25,600 truck driver positions left unfilled in 2022.

Canada's largest trucking company, TFI International Inc. (TFI), has been a long-term bonanza for shareholders. Over the past five years, TFI shares have climbed about 160%. When dividends are factored in, the total return since 2018 comes in at more than 400%, with huge numbers over longer periods.

Staff at U.K.-based data provider Refinitiv, which merged with the London Stock Exchange in 2021, analyzed TFI, its Canadian competitor Mullen Group Ltd. (MTL) and another Canadian logistics company, Element Fleet Management (EFN). Refinitiv, which scores companies based on earnings, fundamentals, relative valuation, risk, and price momentum, granted TFI and Mullen each an average score of 10 out of a possible 10, while Element Fleet Management scored an eight.

It has not always been a smooth ride for investors. In late April 2023, both TFI and Mullen shares plunged in the wake of disappointing first-quarter results from TFI. In the management discussion and analysis (MD&A) accompanying its 2022 annual report, TFI warns that while the trucking company is diversified across many markets and modes of transportation, the industry could be hurt by factors such as high-interest rates, inflation that affects wages, energy and commodity prices, labour shortages, global supply chain challenges and slower growth in many international markets.

TFI International Inc. (TFII)

TFI, based in Montreal, has trucking operations in Canada, the U.S. and Mexico. Its stable of more than 80 operating companies and 540 facilities employ about 25,800 workers, of which 12,300 are drivers. The company operates in four divisions: logistics, truckload, less-than-truckload and package and courier.

The company has grown by acquisition, taking hundreds of smaller trucking firms under its umbrella while leaving their managers in place. As of the end of last year, TFI had acquired 114 businesses, including 11 in 2022.

The share price hit a low of about $31 in March 2020, then soared above $150 in the summer of 2021 but slipped back down to near the $100 level for three months in spring 2022 after the company reduced its dividend. The payout has since been increased, however, and as of late April 2023, the annual dividend of US$1.40 yielded about 1.3%.

TFI's share price plunged more than 10% on April 25 as investors reacted to poor first-quarter results. Total revenue in the first quarter fell to US$1.85 billion, down from US2.19 billion, while net income fell to US$111.9 million or US$1.27 per diluted share, compared to US$147.7 million (US$1.57) in Q1 2022. The company blamed the slip on reduced freight volumes and non-recurring costs such as severance and early retirement buyouts, together with unfavourable currency translations. Investors overlooked the positives, such as net cash from operating activities growing to US$232.1 million, up 69% over Q1 of 2022 and free cash flow growing to US$195.7 million, up 113%.

Despite the reaction to its first-quarter results, TFI's market capitalization (shares times share price) was still $12 billion as of mid-May, while its shares traded at 12.3 times earnings. Its long-term debt was US$1.316 billion as of the end of 2022, down from US$1.608 billion at the end of 2021.

Last year, TFI generated a net income of US$832.2 million or US$9.02 per diluted share on revenue of US$8.81 billion, up from US$754.4 million or US$7.91 per share in 2021.

The company's less-than-truckload segment saw revenue soar by 43%, while its truckload group's revenue was up 13%, logistics climbed by six per cent, and package and courier revenue eked out a one per cent  improvement.

The company repurchased about US$568 million worth of its own shares in 2022. Along with increasing shareholders' equity and earnings per share, buybacks are an indicator that insiders feel their company's shares are undervalued.

On March 12, Refinitiv increased its average score for TFI from nine to 10 out of a possible 10, noting the company's shares are deemed as a buy by the 19 analysts who follow it, with the mean recommendation based on a standardized five-point scale. CFRA, part of S&P Global Market Intelligence, ranks TFI as a strong buy based on its valuation, quality and price momentum. The company's overall score ranked in the ninth percentile of all stocks in its model universe, CFRA said.

Mullen Group Ltd. (MTL)

Based in Okotoks, Alberta, Mullen's 39 operating business units include less-than-truckload, logistics and warehousing, specialized and industrial services and the U.S. and international logistics, with additional services provided to Western Canadian mining, forestry, and construction industries in areas such as water management, fluid hauling and environmental reclamation.

Mullen's shares have climbed steadily since the market's pandemic low in March 2020. The company has acquired more than 80 businesses since it went public in 1993, its 2022 financial review said.

At a recent share price of $15.24, Mullen's monthly dividend of six cents per share (72 cents per year) yields a generous 4.7 per cent. The dividend was raised 20% last year.

Mullen reported excellent first-quarter results in late April 2023 as earnings nearly doubled and revenue climbed by nine per cent from the first quarter of 2022. The company earned $31.7 million or 34 cents per share on total revenue of $497.8 million in Q-1 2023, vs. 16.4 million (17 cents) on revenue of $456.9 in the same quarter a year ago.

In an accompanying statement, chairman Murray Mullen lauded the results but issued a warning. "I fully expect there will be no meaningful growth in the North American economies for the foreseeable future, as end-consumer demand remains under pressure with consumers pivoting away from buying things to doing things, such as travel and leisure. This means the demand for most freight services will remain subdued and competitive."

The company's diversified business model offers a degree of protection, he said, as there will be opportunities in energy and mining while acquisition valuations will become more realistic.

On 19 March 2023, Refinitiv increased its average score for Mullen from nine to 10 out of a possible 10, noting the company's shares are deemed as a buy by the ten analysts who follow it. CFRA describes Mullen as a strong buy based on its valuation, quality, and growth. Mullen's overall score ranked in the tenth percentile of all stocks in its model universe, CFRA said.

Element Fleet Management (EFN)

Another logistics player, Toronto-based Element, describes itself as the world's largest pure-play automotive fleet manager, with operations in Canada, the U.S., Mexico, Australia, and New Zealand. Element helps its clients buy, lease, maintain and sell fleets of cars, trucks, and material handling equipment, along with helping to train drivers, buy fuel and other services. Together with customers in the transport industry, Element's customers include businesses in areas such as construction, energy, food and beverage and healthcare industries. The company's site describes its size: $15 billion in assets, 1.5 million vehicles under management, 5,500 clients served in more than 700 industries and more than 2,500 employees in 11 offices around the world.

Since hitting a low of $11 a year ago, Element's shares have climbed about 85% and now trade near $20. At this price, the stock trades at about 22 times trailing earnings per share of 94 cents, and the annual dividend of 40 cents per share yields two per cent.

In 2022, the company generated record results, reporting a net income of $490.6 million or 96 cents per share on net revenue of $1.132 billion. For 2023, the company said it expects to book net revenue of between $1.14 billion and $1.17 billion and to generate adjusted operating income of $615 million to $645 million, with adjusted earnings between $1.12 and $1.17 per share.

Element returned $192.9 million cash to common shareholders through buybacks of 13.9 million common shares in 2022. For 2023, Element said it plans to maintain an annual common dividend representing between 25% and 35% of the company's last 12 months' free cash flow per share.

Refinitiv increased its average score for Element to nine from eight late in April. The Refinitiv report says Element's shares are seen as a buy by the nine analysts who follow it. CFRA ranks Element as a buy based on its growth and price momentum. Element's overall score ranked in the 28th percentile of all stocks in its model universe, CFRA said.

Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post.