The Globe and Mail
The road has been a bit rough for Canada's publicly traded trucking companies this year. Underwhelming results have blunted investors' hopes that the firms would build on recent robust sales gains.
Some truckers, however, have been busily diversifying their business models from the traditional task of hauling tractor-trailers full of freight for their customers. They're building better-rounded transportation companies that, while not immune to business cycles, can better absorb economic ups and downs.
In addition, many of the big players are poised to pick off smaller operators that are tiring of the economics of an industry that often has too much capacity for too little cargo.
For now, the trucking companies generate solid cash flow, which they return to shareholders through attractive dividends. And, they're relatively inexpensive to boot, with price-to-earnings ratios in the low double digits.
It all adds up to opportunity for investors who are focused on – dare we say it – the long haul.
Certainly, though, there are reasons why investors are lacking enthusiasm for the industry in the short term. A number of companies either missed earnings expectations in the second quarter, reported profit declines, or both. Blame it on a slowdown in building activity: Trucking companies haul a lot of materials for construction companies and as building has slowed, so have truckers.
The largest of the truckers, TransForce Inc. of Montreal, was not immune, reporting a tiny year-over-year profit gain that reflected what analyst Fadi Chamoun of BMO Nesbitt Burns calls "challenging operating conditions." TransForce operates more than 11,000 trucks and posted nearly $3-billion in sales over the past 12 months. But only about one-third of the company is devoted to hauling truckloads of goods to one or more customers.
Instead, the largest single segment of the business – roughly 40 per cent of sales – is now "package and courier services." This part of the company includes parcel company Canpar and two businesses acquired in 2011: DHL Express Canada, now rebranded as Loomis Express, and Dynamex, a same-day delivery company that operates here and in the U.S.
TransForce is also expanding its "specialized services" – businesses such as waste hauling and energy-industry services. These combine for about a quarter of the company's revenue.
This strategic shift will continue "to transition TransForce from a trucking company to a more diversified transportation company as it increases its exposure to higher-margin service lines," says Mr. Chamoun, who has an "outperform" rating and $23 target price on TransForce shares, slightly above current trades around $21.
Free cash flow, a measure of how much a company is creating on top of what it needs to reinvest in the business, suggests that TransForce is throwing off money at an impressive rate. Mr. Chamoun believes the trucker will generate $226-million in free cash flow this year, a yield of roughly 12 per cent based on current share prices. That is far in excess of the company's 2.5-per-cent dividend yield, suggesting that the firm has ample room to raise its payout, if it so chooses.
On top of that, Walter Spracklin of RBC Dominion Securities believes the earnings guidance from TransForce management is likely conservative. The outlook doesn't include acquisitions, which he believes will pick up next year and likely drive the share price higher. With stronger-than-expected cash flow in the second quarter, no dividend hike and greater borrowing capacity, "we believe management is gearing up for increased M&A activity in 2014."
Contrans Group Inc. of Woodstock, Ont., is a more conventional "truckload" carrier, one that hauls a trailer full of cargo for a single customer. ("Less-than-truckload" carriers serve more than one customer per trailer, increasing handling time and cost due to the multiple stops.)
Yet the company is also exploring services beyond its traditional offering; Mr. Chamoun notes Contrans has been developing a temperature-controlled pharmaceutical service and he expects the company to build its waste-management business.
Still, roughly 30 per cent of its 2012 revenue came from hauling goods for the construction industry, meaning its profits have been dinged more than others in the recent slowdown.
Mr. Chamoun, however, notes that Contrans Group heavily uses non-employee truck drivers – "owner-operators" who own their own rigs. This "asset-light" model allows Contrans to respond relatively quickly to market conditions and maintain consistent operating margins. (The company posted margins between 8 per cent and 10 per cent every year between 2004 and 2011, topping 10 per cent last year.)
Fewer company-owned trucks also means less of the capital expenditures that can cut into cash flow. That helps support a stock-buyback plan that took nearly 6 per cent of the company's shares off the market last year, as well as a dividend that yields nearly 5 per cent at current prices. Or, the cash can be used for deals: Contrans, like TransForce, has a history of acquisitions.
While Mr. Chamoun has a "market perform" rating on Contrans, he also has a $12.50 target price – about 14 per cent above current levels.
A more adventurous pick is Trimac Transportation Inc. of Calgary. It is a niche player in Western Canada in the realm of "bulk trucking" – the transportation of unpackaged goods, often commodities. The shares have declined this year after optimism from a solid first quarter yielded to a disappointing second period and management reduced its outlook for the remainder of the year.
Mr. Spracklin has a "sector perform" rating, but a $6 target price that's more than 20 per cent above current levels. "From a fundamental perspective, our view on Trimac is positive as a result of the company's competent management team and niche position."
It's enough to suggest that investors get on board — and then keep on truckin'.
David Milstead