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TransForce: A stock with traction for the long haul?


As the digital age reshapes commerce, TransForce Inc. continues to adapt to the times. Investors themselves need to change how they think about the company.

Traditionally heavily exposed to Ontario's manufacturing base, TransForce is now more of a play on e-commerce, as the focus shifts from hauling freight in tractor trailers to the higher margin package and courier business.

"That's a much better business," said Barry Schwartz, portfolio manager at Baskin Financial Services. "Those kinds of companies get much higher multiples."

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While TransForce's evolution unfolds, investors may find much to like about the stock in the meantime: a reasonable valuation, low debt, a decent yield, heavy free cash flow and plenty of options for how to use it.

Many investors likely still think of TransForce as a trucking company first and foremost, said Michael Decter, president of LDIC Inc. "It takes a while to change one's image."

He said he suspects the market is a "couple of quarters behind" in appreciating TransForce's progress.

Of course, the Montreal-based company is still in the business of moving freight, but that segment has been squeezed by the shrinking profile of Canadian manufacturing, including the auto sector.

"Five years ago in Ontario, we had lots of industrial customers," chief executive officer Alain Bédard said in a conference call in February. "Today we're down 50 to 60 per cent of what we were serving. Those guys are all shut down. Closed. Gone."

TransForce's response has been to trim its less profitable trucking operations and improve profitability, while grabbing market share through acquisitions. In December, the company announced it was buying Vitran Corp. Inc., another Canadian trucking and logistics company, for $136-million (U.S.).

They seem to want to become a monopoly, Mr. Schwartz said. "They're buying up stuff just to take the trucks off the road. They want to get rid of their competition."

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It's not all bad news in trucking, however.

The improving U.S. economy helps in boosting cross-border trucking. So does the cheap Canadian dollar. Future earnings will indicate just how much.

The next quarterly report will also clarify the extent to which a brutal winter smothered the company's transportation volume. The last report was a rough one in that regard.

Citing harsh conditions, TransForce reported in late February that its fourth-quarter profit fell to $12.3-million (Canadian), down 65 per cent from one year earlier. The numbers fell short of even limited analyst expectations.

At $23.29, the stock is now 10 per cent off of its November peak closing price, making for a clear buying opportunity, said Mr. Schwartz, who sees the potential for a $30 share price within a year.

Some investors might consider waiting for a further dip should TransForce miss again on first-quarter expectations.

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"The first quarter I think is going to be another write-off for the company, just because of weather," Mr. Schwartz said. But there is probably limited downside from here, as TransForce itself has recently purchased shares when they fell to about the $23 mark, he explained. "They're telling you, 'If it goes below there, we're there to support you.'"

The company certainly has the cash to back that up. Even after a recent negative revision, TransForce expects to generate this year about $250-million of free cash flow, on top of what it needs to reinvest in the business.

Cash creates opportunities. "The strategy of extracting synergies from existing assets, mergers and acquisitions, stock buybacks has not changed," Maxim Sytchev, an analyst at Dundee Capital Markets, said after the earnings miss. He has a "buy" rating and a $28 target on the stock.

Beyond the short term, much of TransForce's promise lies in expanding its package and courier segment, which is already the company's single biggest line of business, accounting for about 40 per cent of revenue.

The expected rise in e-commerce will naturally lead to increased parcel volumes. And TransForce is in a good position to capitalize, Mr. Decter said. "With Canada Post pulling back and trying to save itself, there's probably some room."

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