TFI International: Navigating a "Very Weak" Q1 with Hope for a Stronger Q2

TFI International (TSX: TFI), a leading North American transportation and logistics provider, has found itself in a familiar balancing act: underperforming in the near term but positioning for a rebound. After RBC Capital Markets labeled its Q1 2025 results as "very weak", the company’s shares dipped initially—only to rally 8% post-earnings as investors latched onto its Q2 guidance. Analysts at RBC cut their price target to US$94 from US$98 but maintained an "outperform" rating, signaling cautious optimism about TFI’s ability to navigate cyclical headwinds.

The "Very Weak" Q1: Missed Expectations and Margin Pressures

TFI’s Q1 2025 results were a stark reminder of the challenges plaguing the logistics sector. The company reported adjusted diluted EPS of $0.76, a 39% year-over-year decline and a 27% miss versus consensus estimates. Revenue came in at $1.96 billion, below the $2.07 billion forecast, as cross-border freight volumes fell 10–15% year-over-year due to trade policy uncertainty and soft industrial demand.

The core issue? Margin erosion. TFI’s U.S. Less-Than-Truckload (LTL) segment—a critical profit driver—saw its operating ratio (OR) rise to 99%, up 160 basis points sequentially, as rising operating costs outpaced revenue growth. RBC’s Walter Spracklin noted that this reflected broader industry struggles: weak pricing discipline, customer churn, and lingering operational inefficiencies inherited from the UPS Freight acquisition.

Yet, the story isn’t all doom. Free cash flow surged to $192 million, a 40% jump year-over-year, thanks to disciplined working capital management and reduced capital spending. TFI’s 24-year dividend streak and a $56 million Q1 share buyback further underscored its financial flexibility, with a debt/EBITDA ratio of 2.21x—comfortably below its 2.5x target.

Q2 Guidance: A "Bottoming Out" Signal?

The real market mover was TFI’s Q2 2025 guidance, which projected EPS of $1.25–$1.40, implying a 70% sequential rebound from Q1. Analysts interpreted this as a sign that Q1 might mark the earnings low point, with management citing early improvements in its U.S. LTL division:

• OR Target: The segment’s OR is expected to drop to 96% in Q2, a 300 basis-point improvement year-over-year, driven by cost controls, renegotiated pricing, and leadership changes.
• Volume Stabilization: Small- and medium-sized business (SMB) volumes grew 2% sequentially, reversing prior declines, as TFI shifted focus to high-margin accounts.
• Tech-Driven Efficiency: Investments in software like Optum (for linehaul planning) and upgraded pricing tools aim to reduce costs and improve route optimization.

RBC’s Take: Cut the Target, Keep the Rating

RBC’s decision to lower its target to US$94 reflects concerns about near-term macro risks—such as tariff volatility and industrial sector weakness—but its "outperform" rating hinges on TFI’s long-term strengths:

1. Balance Sheet Resilience: With $1.3 billion in liquidity and a strong free cash flow yield (~10%), TFI can weather downturns while capitalizing on opportunistic share buybacks.
2. Strategic Execution: Management’s pivot to SMBs, cost discipline, and operational reorganization (e.g., reassigning roles in the U.S. LTL division) are starting to show results.
3. Long-Term Leverage: Analysts note that TFI’s sub-90% LTL OR target (by end-2025) remains achievable if pricing discipline holds and volume trends stabilize.

The Risks That Linger

Even with the Q2 optimism, RBC flags several risks:
- Trade Policy Uncertainty: Tariff disputes between the U.S. and China continue to delay industrial and agricultural shipments, key TFI clients.
- Competitive Pressures: UPS’s entry into TFI’s Guaranteed Freight Program (GFP) space could test pricing power.
- Deleveraging Focus: Minimal M&A in 2025 means growth must come from organic improvements—a tall order in a sluggish market.

Conclusion: A "Buy-the-Dip" Opportunity?

TFI International’s Q1 stumble was significant, but its Q2 guidance and financial flexibility suggest it’s not panicking. With a 70% sequential EPS rebound on the table and a balance sheet that can absorb shocks, the company appears positioned to outperform peers as macro conditions normalize.

RBC’s lowered target reflects near-term caution, but its "outperform" rating is no accident: TFI’s $192 million free cash flow, $56 million in buybacks, and 96% Q2 OR target all point to a path to recovery. While risks like tariffs and weak industrial demand linger, the stock’s 50% drop from its December 2024 peak may have priced in much of the bad news.

Investors should monitor two key metrics:
1. U.S. LTL OR Progress: A sub-90% OR by year-end would validate management’s turnaround narrative.
2. Cross-Border Volume Trends: A rebound in cross-border freight (now down 15% YoY) could unlock upside.

For now, TFI remains a "buy-the-dip" play—provided shareholders are willing to endure the volatility of a cyclical industry.

Data as of Q1 2025. Past performance does not guarantee future results.