Sell the Canadian rails, buy the trucking. A protest play.

protest blockadeThe effect of the blockades on railway revenues and earnings  (they’re being taken down finally) are yet to be measured, but it won’t be pretty.  Are there any beneficiaries?  Yes, trucking.  Clearly some goods just sat there waiting for the trains to resume service, but no doubt innovative customers of the rails found other ways to keep their customers supplied – and put them on trucks; especially higher value items with a limited shelf life.

There may be a bit of a rebound in the stock price (seems like good news that business resumes) but this will be short-lived.  Long before the earnings for this quarter come out in March investors will figure out that future reported earnings will reflect the costs of these protests (lost revenue, customers shifting to other forms of delivery etc.).

CN Price FEB 2020

Take CN for instance.  Although the stock has been weak of late, it had quite a huge run up (see chart) and still trades at a P/E of about 21X earnings.  When the analysts start talking to the company and revising their earnings estimates, expect the stock to retreat much more – the multiple will likely come down also as growth expectations will have to adjust as well.

On the other hand, the trucking companies must be huge beneficiaries of the blockade. I don’t ordinarily like companies that have just raised money in a public offering – the dealers typically pump up the stock to attract buyers of the share issue.  However, in one case I’d make an exception (although I might wait a week or so for the stock to settle down).  TFI International (once called TransForce) just improved its balance sheet by issuing stock.

MONTREAL, Feb. 18, 2020 (GLOBE NEWSWIRE) — TFI International Inc. (NYSE and TSX: TFII), a North American leader in the transportation and logistics industry, today announced the closing of its previously-announced marketed offering of common shares in the United States and Canada, representing TFI International’s initial public offering in the United States.  TFI International issued a total of 6,900,000 shares, including 900,000 shares following the exercise in full by the underwriters of their over-allotment option.  The shares were issued at a price of US $33.35 per share, the equivalent of CAD $44.20 per share based on the Bank of Canada exchange rate at the time of pricing, for gross proceeds to TFI International of US $230,115,000 (approximately CAD $305 million).

It’s Long Term Debt to Equity ratio was 1.16X prior to the offering, which will improve a bit, but more important there’ll be some relief on interest expense. Also, fuel prices are coming down with oil prices.  At only 12.5X earnings, and a 2.3% dividend the admittedly volatile stock seems to be good value.  It’s new listing on the NYSE gives it a wider audience too.

TFI Price FEB 2020

My interest in these two names (one to sell, one to buy) is a uniquely Canadian situation related to the protests.  It’s important to note that both Canadian and US Transportation companies are under pressure due to the coronavirus – so there’s significant short term risk due to sentiment.  However, smart traders will keep an eye open for a bottoming of these stocks over the next few months.

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About Mal Spooner

Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He authored A Maverick Investor's Guidebook which blends his experience touring across the heartland in the United States with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources which he authored with Pamela Clark — predicted the resources boom back in early 2004.
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