TFI International Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

TFI International Inc. is a North American leader in the transportation and logistics industry, providing services in trucking, logistics, and package delivery.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

TFI International (TFII) operates as a network of largely autonomous operating segments, or “operating companies”, where leaders of these operating companies are incentivized through compensation that is linked to performance and not directly from headquarters.

Business Overview

TFI International operates in a highly fragmented transportation and logistics industry, where service quality, cost-effectiveness, geographic coverage, and capacity are the main areas of competition.

  • Revenues Distribution: TFII’s revenue streams are fairly diverse, spanning across different segments. The company is structured into 4 main operating segments: Package and Courier, Less-than-Truckload, Truckload, and Logistics. Each segment caters to different transportation needs.
    • Package and Courier: This segment primarily deals with small packages, generally of very low weight, delivered to residential and commercial customers, and mostly in Canada.
    • Less-Than-Truckload (LTL): This business specializes in shipping freight that does not require an entire truck trailer.
    • Truckload: This segment is concerned with providing transportation services for larger loads that fill the entire trailer.
    • Logistics: This is mostly non asset based segment that provides a suite of integrated transportation logistics services, such as freight brokerage, freight forwarding, and other value-added services, using either assets or third-party capacity, to its customers.
  • Industry Trends: There is a continued growth in e-commerce, which has created a lot of demand in the package and logistics segments. There is also a trend towards greater supply chain efficiency, leading to increasing demand for integrated logistics services. The transportation industry is highly competitive, with a large number of players that range from large corporations to small, private firms. Technology has been transforming the industry as new digital tools continue to improve efficiency and communication between carriers and customers. Fuel price volatility, driver availability, and governmental regulations can have significant effects on the margins of the transportations industry. There has also been a push towards sustainability, and both companies and governments are placing importance on sustainability targets in logistics.

TFI’s acquisition strategy is a crucial aspect of its business model. The company targets acquisitions that are profitable, well-managed, and that provide a compelling strategic fit.

  • What makes the company different: TFI is very focused on its return on invested capital and profitability. They have an extensive acquisition strategy and the company is well diversified with no single customer that is over 3% of their revenue. The company seems to be focused on improving the underlying operation of its individual business units, focusing on local and independent management. It also is focusing on creating good relationships with its employees and having a good working culture.

Moat Analysis: 3/5

TFI International possesses a narrow moat that is built primarily on network effects and local economies of scale, with limited switching costs. They have many companies that have good geographical coverage and also strong networks of distribution and contracts with its customers.

  • Network effects: The company has a significant network of routes, customers, and contracts, creating a barrier for competitors to replicate its business. This is especially apparent in the LTL segment, where TFI’s extensive network of terminals and routes provides a service to a vast area, which helps them move freight between many locations much more efficiently, with smaller transfer times than competitors. The same is true with their package and courier segment. For example, their TForce Integrated Solutions segment has 79 terminals and delivers to 96% of the postal codes in Canada. The bigger their network becomes, the better the value of their services.

  • Scale and density: TFI has made many acquisitions in areas, such as truckload and package delivery, allowing them to have high route density and more efficient pick-up and delivery schedules. Having a lot of trucks in an area, and filling those trucks more efficiently than competitors, leads to better pricing opportunities. Having a lot of warehouses in strategic areas makes transport between those points much more efficient.
  • Switching Costs: Customers in the less-than-truckload and dedicated-truckload segments who have complex logistical needs may find it difficult to switch to a new provider, which provides some switching costs to TFI.

Why not a wide moat?:

  • Limited Pricing Power: The company operates in the highly competitive transportation and logistics industry, which makes it very hard to have significant pricing power.
  • Technology and Disruptions: There are new forms of software that can help smaller companies compete effectively with larger companies, reducing the effectiveness of scale. There also exist disruptive technologies that are likely to change the industry. The rise of last-mile delivery companies is reducing the value of traditional delivery networks. There is also a move towards greener transport options and regulations that will require companies to adapt quickly to changes.
  • Low Switching Costs: The switching costs in this industry are generally low for non-integrated clients. For customers that just need to ship a load or a package, the switching cost of going to one carrier vs another is very low and driven by pricing.

Risks that Could Damage the Moat and Business Resilience:

Despite its strong position, TFI International is not without risks that can impact its moat and business resilience:

  • Economic Downturns: Changes in macroeconomic conditions that affect overall demand for freight can impact TFII’s revenue and profits. This is especially true for companies that rely on just-in-time delivery.
  • Rising Fuel Prices: The price of fuel directly affects the operating margin of the company as it is a large portion of their expenses. Any increase in fuel costs will directly reduce the company’s profitability.
  • Labor and Driver Availability: The shortage of truck drivers is a growing challenge in the trucking industry. This has been putting pressure on driver pay, and increases the chances of not being able to fulfill all the needs of their customers. This is also very difficult to hedge due to high competition for drivers and the lack of a barrier to entry.
  • Competitive Intensity: The industry is fragmented and competitive, and new entrants can challenge TFI’s market share. Many of these are local and smaller firms, that could undercut TFI on prices.
  • Technology Changes: Failure to adapt to new digital technologies can erode TFI’s competitive advantage, making the business more vulnerable to competitors.
  • Integration Risks: Integration of newly acquired companies could face challenges in operations, resulting in slower improvement than expected.
  • Regulatory Changes: There is a risk of changes in regulations which could affect the transportation of products between countries and local jurisdictions.

Financial Overview

TFI International has consistently grown over the past decade both organically and by acquisition. Their focus on the financial viability of their acquisitions is the foundation for their value creation.

  • Historical Performance: TFI has consistently demonstrated revenue growth with a combination of organic revenue growth and revenue from acquisitions, while also improving returns on invested capital and profitability metrics over time. They have been very adept at buying companies that are in distress, turning them around, and integrating them.
  • Margins and Profitability: Operating profit margins and profitability are dependent on the different business segments of TFI. Truckload usually has the lowest operating margin, while package and courier operations and the logistics divisions usually have more profitability. Overall, the company has maintained above-average operating profit margins when compared to other firms in the industry.
  • Capital Efficiency: The company has a strong understanding of working capital requirements of their operations and they keep a good balance between return on invested capital and the need to expand and grow. Historically, the company has been very efficient on allocating capital.
  • Financial Position: TFI maintains a comfortable amount of cash and also access to enough debt to fund their operations and acquisitions. They typically have a leverage ratio of 3 to 3.5 net debt-to-EBITDA, but they can lower it if they decide to use less leverage.
  • Capital Allocation: The company has a strong history of capital allocation. Acquisitions are done at good prices that offer a clear strategic advantage. The company is now looking into increasing their buyback capacity and is signaling a slowdown in future acquisitions. This shows an efficient use of capital.
  • Recent Performance:
    • In the latest earnings calls, TFI reported good financial results with a 4.6% adjusted operating income growth. LTL had a positive organic growth of 1% and 13% increase from its acquisitions. Truckload was also doing very good, with 7% organic growth. Logistics had a 13% decrease due to the tough environment in that sector. However, the financial statements reflected lower fuel surcharges because of lower fuel prices, which made the earnings numbers look worse. After adjusting for this, the financial results were very positive.
    • In the latest earnings call, TFI announced that its Board of Directors have approved share buybacks for up to 30 million shares.
    • There are some concerns about future projections due to the slowing economy, however the management is optimistic about future performance and that the company’s results are going to be resilient even in tough times.

TFII’s management does not focus on short term profitability. They focus on the long term outlook of the business and long-term value creation.

Understandability: 3/5

TFII’s business model is relatively straightforward, especially for investors with some familiarity with the transportation and logistics industry. Their core segments, including package and courier, LTL, truckload, and logistics are easy to grasp. The financial statements require careful attention due to the level of acquisitions and the differences between business lines and how these impact metrics like ROIC.

Balance Sheet Health: 4/5

TFI maintains a solid balance sheet, reflecting a blend of debt and equity that is well-managed. They target a 3.0 to 3.5x Debt/EBITDA ratio, that shows good control of leverage, while being able to take advantage of opportunities. Their net debt is about $3.3 billion, with cash at hand at around $1.0 billion. The company has a manageable level of short and long term debt.