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.
Key Company Metrics
A set of metrics we constantly keep updated to monitor the investment thesis.
TFI has the largest trucking fleet in Canada and a significant presence in the US market. The company owns tens of thousands of tractors and trailers and has almost 10,000 independent contractors.
The sheer size of the trucking fleet allows TFI to close better deals and spread costs over a wide revenue-generating base when equipping it with the latest technologies. These technologies would include things like automated transmissions, collision avoidance, and enhanced stability technologies. TFI's vehicles use the latest advancements in fuel economy, safety, and aerodynamics for greater efficiency.
A larger trucking fleet also inherently provides better data and market intelligence to the company to better equip its fleet and meet its customers' needs.
As part of its Asset-Right strategy, TFI aims to increase the use of independent contractors to replace owned equipment. This helps to reduce capital needs while maintaining scalable capacity and reliable service.
The company has also placed a heavy focus on technology-based solutions. For example, TFI offers a web-enhanced experience to customers that facilitates and expedites their orders and inquiries. This increases internal efficiency and helps TFI save money.
With all these initiatives in place, TFI has been able to deliver industry-leading operating margins and free cash flow conversion, and the lowest capital expenditure requirements expressed as a percentage of revenue.
Leveraging a Strong Balance Sheet
Trucking and logistics are industries mostly comprised of entrepreneurs with small local businesses. Well-capitalized, large consolidators - like TFI - have a strong advantage over the industry players that are much smaller in size or large players that have poor balance sheets.
TFI uses a disciplined and proven strategy for finding acquisition targets across the highly fragmented industry and has successfully acquired over 100 trucking and logistics companies of varying sizes since 2008.
Instead of forcing acquired companies to integrate, TFI prefers a mix of corporate cultures and prides itself on maintaining a decentralized and entrepreneurial-spirited company. We also believe this is the most effective way to run a prolific acquisition strategy, as it creates a welcoming environment for the acquisition targets while also promoting diversity of thought and the ability for the target to maintain their business relationships.
TFI has been able to de-leverage its balance sheet considerably since 2015 because of its growing EBITDA. With a higher earnings base, TFI will be able to take on additional debt capacity while still running a conservative balance sheet for the industry its in. Going forward, we believe this balance sheet will help TFI widen its moat.
TFI's four segments operate differently, each of which have their own unique competitive advantages.
Truckload - Almost 50% of revenues from specialized truckloads, which require specialized equipment and / or expertise, providing additional barriers to entry. TFI can leverage its size and brand name to attract the best talent and buy top-tier equipment while its competitors are left in the dust.
Logistics - logistics services are a complete one-stop experience for customers. TFI offers full-service logistics, including brokerage, freight forwarding, and transportation management. This segment requires virtually no capital expenditures, generating high returns on invested capital.
Less-than-Truckload - UPS Freight is a less-than-truckload ("LTL") operation recently acquired by TFI. The company’s revenues are expected to double, making it the 5th largest LTL carrier in the United States. This method of operations allows TFI to build scale-based cost advantages through the consolidation of shipments in local hubs. TFI is building a moat based on network density.
Package & Courier - This segment employs the hub-and-spoke model for its operations, which helps maximize freight efficiency by enabling a continuous flow of products in its transportation network. The segment also opts to use contractors in its asset-light strategy to reduce the burden of owning heavy assets.
E-commerce is 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 thanks to its extensive network across North America. TFI's e-commerce revenues have grown at a low double-digit compounded annual growth rate over the past decade. TFI's management team expects e-commerce to help the Logistics and Package & Courier segments grow and expand margins.
TFI is positioned to continue growing in its current markets. TFI will continue growing through acquisitions as it operates in a highly fragmented market. The company prefers asset-light businesses that will suit TFI's approach to the way it manages capital. The strong balance sheet helps the company get through economic downturns while also providing ample liquidity to acquire great businesses.
We believe TFI carries a fair valuation considering it will continue to benefit from e-commerce and general freight tailwinds.
The transportation industry as a whole creates substantial carbon emissions. The trucking industry in particular is much more carbon intensive than moving goods by rail.
Not only could the valuation multiples for TFI never expand beyond its current levels, they may even contract as investor preferences change.
Large institutional funds and increasing numbers of investors are looking for companies that meet ESG (i.e., environmental, social, and governance) criteria.
However, we believe trucking is a critically important part of our functioning society. As long as TFI stays on top of ESG trends in its industry - like adopting electrification and self-driving vehicles - we believe there will be demand for the business in portfolios everywhere.
Hiring and retaining drivers can be challenging as there are shortages of them across the industry in North America.
Currently, Canada is short by about 25,000 truckers and the US is short by about 60,000 truckers.
If TFI wants to attract good talent that will stay for years, TFI might need to pay a premium price for drivers. The industry as a whole is undesirable to many people due to low pay and poor working conditions.
This may pose substantial revenue and cost pressures on TFI if it continues to grow.
TFI conducted many acquisitions over the past decade and will continue to acquire companies to grow. There are several general risks that come with this strategy:
Cost and revenue synergies may not meet expectations;
The pool of attractive acquisition targets may shrink over time;
TFI may need to conduct larger acquisitions that are more difficult to integrate and realize synergies from given how large the company has grown; and
Valuation multiples may rise to levels that decrease forward returns on acquired targets if market conditions are favourable for transportation businesses.
Additionally, the large recent acquisition of UPS Freight brings size complexity, unions, and a grand challenge to integrate into TFI. The acquisition is a substantial amount of the combined business today. But, TFI has decades of experience in integrating acquired assets. We believe Alain Bedard and the team are well prepared for the challenge.
TFI's CEO, Alain Bedard, has led TFI dating back to the late 1990s. The success TFI enjoys today is due, in large part, to Bedard's leadership.
Bedard has been leading the company for almost 30 years. The departure or retirement of Bedard could be a potential risk to the company.
However, Bedard has evidently had an overwhelmingly positive impact on the strategic and operational direction of the company. As long as the company stays true to these core values, we believe the company will continue to be a great business.
Transportation and logistics are two highly cyclical industries. When there are economic downturns in the future, TFI may face revenue and profit declines more severe than companies in other industries, like technology.