TFI International|Beat Built on Fewer Trucks

The Beat

TFI International just posted second quarter net income of $136.2 million U.S., up 39% from $98.2 million a year ago. Diluted earnings per share rose 41% to $1.65, and it was the Truckload segment, not the flagship Less-Than-Truckload business, that carried the quarter, with Truckload operating income surging 50%.

But TFI grew that Truckload profit while its equipment count shrank. At the end of June the company ran 11,987 trucks, down from 13,511 a year earlier, and trailers fell too, from 42,726 to 39,710. Revenue per truck per week, excluding fuel, still climbed 21.6%. Fewer trucks generated more profit per truck.

That combination raises the real question for anyone watching TFI right now. Is this the start of a genuine freight-cycle recovery that will keep compounding, or is management simply squeezing more margin out of a fleet it has been shrinking, a move that has a ceiling once the easy efficiency gains run out.

The Weak Link

Less-Than-Truckload, TFI's largest and most closely watched division, told a softer story. Revenue per shipment excluding fuel fell 2.1%, and the segment's operating ratio, a core efficiency measure, actually worsened by 100 basis points. Adjusted EBITDA for LTL grew just 4.46%, far behind Truckload's 14.75%.

Corporate expenses nearly doubled year over year, to $20.9 million from $11.7 million, and the company attributed the jump primarily to increased accident-related reserves. That is a cost line investors do not control and cannot easily forecast, sitting alongside a Truckload result the company itself called organic and durable.

So the headline beat is really a one-engine story. Truckload masked a Less-Than-Truckload segment that is still working through pricing pressure. CEO Alain Bédard called the pricing environment in LTL merely encouraging, not resolved, which tells you the segment TFI is best known for has not yet turned the corner the stock price already assumes.

The Price of Optimism

TFI stock has returned 79.7% over the past twelve months and closed near $213.21 ahead of this earnings release. That has pushed the price-to-earnings ratio to about 41.8 times, well above the North American transportation industry average of 34.7 times and a peer average closer to 23.8 times.

Here is the split that defines the setup. On a discounted cash flow basis, using TFI's roughly $577.7 million in trailing free cash flow, the model implies an intrinsic value near 391 Canadian dollars per share, suggesting the stock trades at a 45.5% discount. But on the earnings multiple alone, a fair P/E near 31.8 times implies the market is already paying a real premium above that level.

TFI has guided third-quarter adjusted EPS to a range of $1.70 to $1.80, effectively asking the market to keep believing the Truckload strength continues. The stronger evidence right now favours the cash-flow bulls over the earnings-multiple skeptics, given free cash flow rose 11% to $202.1 million this quarter alone. But the case rests on Less-Than-Truckload finally validating its own pricing recovery, not just riding on Truckload's coattails, and that segment has not yet delivered the number that would settle the debate.