From “Bud the spud from the bright red mud / Rolling down the highway smilin’” to “Take me home tonight, Algoma Central 69”, the inimitable Stompin’ Tom Connors celebrated the romance of truckin’ and railroadin’ in Canada. (Alas, there is no known Stompin’ Tom ballad about the romance of transportation and logistics stocks.)
Stompin’ Tom Connors recorded many a song celebrating the life and work of the long distance trucker and railroader. Just imagine Tom’s angst knowing that the driver-less truck is almost here.
Yes, there is talk of about 72,000 of North America’s 3.5 million truckers being replaced soon by driverless trucks. While the romance of long-distance truckin’ and railroadin’ may be threatened, wide-scale disruption is not in the immediately foreseeable future.
For the time being, it’s business as usual for most established truckers, railways and companies in the transportation industry. Here are two transportation and logistics stocks that are on analysts’ radar screens.
TFI International Inc.
While a death sentence for some, rising e-commerce activity has driven the growth in for-hire trucking volumes over the past few years. Freight volumes have been rising by approximately five per cent year-over-year since the end of 2016. This has proven beneficial for Montreal-headquartered TFI International Inc. (TSX—TFII) which at least one analyst calls a ‘strong buy’. The analyst, who is with an established firm and wishes to remain nameless, gives the stock a $60 target share.
“Freight rates have increased by approximately 11 to 16 per cent in just the last two years, more than offsetting rising labour and equipment costs for carriers. Driver shortages and more stringent monitoring of hours of service (HOS) regulations have limited capacity, putting upward pressure on rates.
“TFII has been the most active consolidator in the Canadian trucking industry, which we believe will continue going forward. From 2015 to 2017, TFII’s revenue grew by 18 per cent, but operating income declined by 12 per cent. In 2018, TFII focused on improving margins and the results have been impressive.
“In addition, TFII’s focus on improving operational efficiency, particularly in its US truckload (TL) segment, has led to impressive results in 2018 year-to-date (operating income growth 77 per cent year-over-year, EBITDA growth 32 per cent). We are forecasting continued growth going forward in fiscal 2019 with operating income growth of 21 per cent.
“We are forecasting continued year-over-year growth in operating income of 21 per cent and 10 per cent in 2019 and 2020, respectively.
“TFII’s diversified business model with both asset-light and asset-based operations, strong margins, and low capital expenditure requirements (on a relative basis) leads to strong free cash flow generation. We are forecasting 2019 and 2020 cash flow per share of $4.80 and $5.47, implying year-over-year growth of 29 per cent and 14 per cent, respectively.
“TFII has delivered 10 per cent dividend growth annually, six-year compound annual growth rate (CAGR), which we think will continue.
“TFII services e-commerce customers from approximately 80 North American cities, and is one of the largest providers of outsourced last-mile delivery solutions in North America. TFII’s e-commerce business has grown at a CAGR of 15.6 per cent since 2012 and represents approximately eight per cent of consolidated revenue.
“TFII is not materially dependent on any given customer and, as a result, is in a stronger position when negotiating rate increases. The capacity constraints created by driver shortages, combined with the fact that demand for freight transportation remains healthy, has allowed the company to implement rate increases to offset higher labour, insurance, and maintenance costs.”
TFII is the largest trucking company in Canada, and one of the largest in North America. The company provides freight transportation, courier and logistics services to customers across Canada, the United States, and Mexico.
Canadian National Railway Company
After a lunch meeting with executives at Canadian National Railway (TSX—CNR), Desjardins Capital Markets analyst Benoit Poirier said that his long-term confidence in the Montreal-based continental freight railway spiked.
The analyst explained that the executives provided him with an update on the company’s capacity shortage issues, required investment, growth opportunities and operating and financial metrics.
Focusing on the growth opportunities, the analyst estimated $1.1 billion to $1.8 billion in incremental revenue generated from a number of CN’s projects.
He reiterated his ‘buy’ recommendation and 12-month target share price of $116.
In a follow up research note on Dec. 6, 2018, Mr. Poirier and Jean-François Lavoie cover CN’s offer to buy a terminal in Halifax.
“Last night, the Financial Post reported that CN has made a preliminary offer to acquire the 30-hectare Halterm Container Terminal located near the Port of Halifax,” say the analysts. “The terminal was sold to Macquarie Infrastructure and Real Assets in 2007 for $173 million. CN currently provides rail services for the port.
“It is partnering with a strategic partner for its bid, which would see its partner operating the terminal eventually while CN would operate the rail infrastructure. We expect further details on the sales process in 2019.
“The Port of Halifax is the fourth-biggest port in Canada after Vancouver, Montréal and Prince Rupert. In 2017, the Port of Halifax handled 559,242 20-foot-equivalent units, up 44.5 per cent year-over-year, and was the fastest-growing port among the top 25 in North America.”
Messrs. Poirier and Lavoie say that the potential investment could provide CN with another opportunity to grow its supply chain proposition while it also strengthens its intermodal business.
“This growth opportunity for CN, similar to the potential container terminal projects at Contrecoeur and Québec City, would enable CN to leverage its excess capacity in the east,” explain the analysts.
“Overall, we like strategic investments of this nature which support CN’s growth story.”
The analysts keep their ‘Buy’ recommendation, ‘Average’ risk rating and $127 target share price.
This is an edited version of an article that was originally published for subscribers in the January 2019/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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