Where Are We Now
Updated on: 11/11/2021
Transportation and logistics are now more important than ever before while supply chains are jammed and e-commerce picks up steam. Although TFI shares have shot up in price since March 2020, we think shares still have room to run today – we believe the company’s valuation is reasonable and still has a long runway in the fragmented trucking market.
TFI’s robust acquisition strategy is helping the business grow its size and scope. The company acquired five businesses so far in 2021 worth a combined $913 million driving quarterly revenue up by over $1.1 billion. Since September 2020, acquisitions expanded TFI’s facility count by 217 facilities to 561 of them today.
Strong e-commerce volume has driven much of TFI’s organic revenue growth as of late. Since we believe e-commerce is still in its infancy, TFI should benefit for decades to come.
TFI International is a prolific acquirer of distressed trucking and logistics assets across North America.
The business, led by Alain Bedard, has demonstrated their disciplined ability to buy assets at attractive prices, improve operations and integrate them into the system. Tucking in smaller acquisitions and now demonstrating their ability to make larger deals like buying UPS Freight, TFI is able to deploy capital at consistently high returns.
Looking long-term, the business can greatly benefit from fleet electrification and self driving trucking.
E-Commerce has been a large growth driver in the Logistics and Package & Courier segments. TFI has the ability to continue to benefit from this trend in last-mile delivery, next-day services, and same-day services from their extensive network across North America.
TFI is a prolific and disciplined buyer of distressed trucking and logistics businesses. The business is organized into four segments:
Less than Truckload
Package & Courier
The business operates in North America with revenues roughly split between Canada and the United States. TFI also does a small amount of business in Mexico. They serve customers across various industries in retail, construction, manufacturing, food, forestry, automotive and more.
The business has a diversified customer base with no single customer accounting for more than 5% of revenues which de-risks customer concentration. In trucking customer concentration can be worrisome where losing a big contract leads to a significant loss on the top line.
The Small-Town Consolidator
TFI International’s origins go back to 1957 as a small trucking business in Cabano, Quebec, Canada. The business began successfully stringing along an acquisition strategy to consolidate smaller local trucking operations. As trucking is very fragmented and ripe for consolidation, the company has completed over 100 acquisitions in their history.
The current president and CEO, Alain Bedard has been with the company since 1996. Bedard has led the business to a multi-billion dollar public company that it is today.
TFII Revenue by Segment (Q3 2021)
Source: TFI Investor Relations
TFI Revenue by Geography (Q3 2021)
Source: TFI Investor Relations
TFI prides themselves on being a decentralized and entrepreneurial spirited company. We also believe this is the most effective way to run a prolific acquisition strategy. A mix of corporate cultures and not forcing acquired companies to integrate cultures can provide strong diversity and maintain relationships.
As the company grows, more frequent and larger acquisitions are of priority. Notably, UPS Freight was purchased for $800M.
TFI and the management team is obsessed with creating shareholder value delivering growth and strong return on invested capital (ROIC) organically and through acquisitions.
Best in Class Operating Metrics
TFI has industry leading operating margins. They lead free cash flow conversion against peers across all segments of the business.
Their focus on improving margins in the LTL segment after the purchase of UPS Freight will be a major effort.
TFI has an Asset-Light Model that keeps capital expenditures lower than peers. This helps drive free cash flow with an industry low percentage of revenue in capital expenditures.
TFII Cash from Operations ($M) (Q3 2021)
TFII Free Cash Flow ($M) (Q3 2021)
TFI has a prolific track record of executing mergers & acquisitions (M&A). TFI has acquired 94 companies across trucking and logistics since 2008.
They have a disciplined strategy and look for where they can find deals across the highly fragmented industry. This often leads to buying distressed assets with the goal of improving the business after purchase and integration into the TFI network across North America.
Trucking and logistics is an industry largely run by small entrepreneurs with local businesses supporting the economy. This makes it ripe for a well-capitalized large consolidator such as TFI to acquire them and find efficiencies.
A large purchase of UPS Freight closed in April 2021 for $800M. UPS Freight did ~$3B in revenue in 2020 representing a 0.27x sales multiple on the purchase which is a terrific deal. This is the largest acquisition in the company’s history and they have paid a reasonable price to grow the Less-Than-Truckload segment.
The acquisition makes TFI one of the largest Less-Than-Truckload player in the United States going from 886 to 7,226 vehicles in the segment.
TFII Revenue with UPS Freight ($M)
TFI stock has done incredibly well due to some underpriced growth from industry tailwinds in e-commerce especially in last-mile delivery. E-Commerce has been a large growth driver in the Logistics and Package & Courier segments. TFI has the ability to continue to benefit from this trend in last-mile delivery, next-day services, and same-day services from their extensive network across North America.
We believe TFI is still underpriced considering they will continue to benefit from E-Commerce and industry tailwinds.
The transportation industry is very carbon emission intensive. The trucking industry in particular is much more carbon intensive than moving goods by rail.
In addition, hiring drivers can be challenging as there is such a strong demand for them across the industry.
However, the fuel and hiring pressures provide long-term opportunity for TFI and the trucking & logistics industry. Even in the medium term, this industry will see significant changes from fleet electrification and self-driving vehicles. While the technology has limitations right now and longer routes have electrification range concerns, the long-term story remains.
The very large acquisition of UPS Freight brings size complexity, unions and a challenge to integrate UPS Freight into TFI. The acquisition is a considerable amount of the business. But, TFI has decades of experience in integrating acquired assets. We believe Alain Bedard and the Team are well prepared for the challenge.
TFI International continues be disciplined and prolific acquirers in a highly fragmented trucking and logistics industry. TFI continues to benefit from strong tailwinds driven by E-Commerce. The risks in the short term of carbon intensity and hiring pressures have an optimistic solution in the medium to long term.
With a skilled and experienced management team, TFI International will continue to drive shareholder returns. We believe the business has underpriced growth both organically and through acquisitions.