We’re right in the thick of earnings season, with a lot of Premium-related companies reporting this week, including some new Bull List additions.
The markets have settled but will remain wildly unpredictable over the short term. I’ve spoken enough about tariffs, the economy, and a potential recession. So, instead, I will get back to doing what members appreciate me doing: providing rock-solid research and updated commentary on some of the best companies in North America to improve your portfolio returns.
Let’s dive right into it first with my portfolio moves.
Portfolio moves
My portfolio has held up quite well this year, down only 3.72% versus the S&P 500 and NASDAQ being down 6% and 9%, respectively.
As mentioned over the last 3-4 months, I had built up a 15%~ cash position in my portfolio. I have slowly begun to deploy it over the last month or so now that my money has been fully moved to Questrade.
I made several adds this week, including to recent Bull List stocks Uber (UBER) and Cargojet (TSE:CJT). However, on top of this, I made routine additions to last week’s Value Call Amazon (AMZN), Berkshire Hathaway (BRK.B), and Visa (V).
My cash position now sits at around 9.93%, and I will continue to dollar cost average not only my weekly contributions but a portion of this cash position as well.
Most of these were routine additions. However, I did add more than normal to Amazon as I am looking to grow my allocation to the 5%~ range from its current 3.95%. My addiction to Cargojet was primarily based on an outstanding earnings report from the company. However, I’ll speak about that next.
Remember, my entire portfolio, along with my portfolio moves, are available via the website. Log in to your account, select the “Premium” menu option, and choose Dan’s Portfolio. Alternatively, you could click here and bookmark the page.
Earnings
Cargojet (TSE:CJT)
Cargojet reported a strong quarter to kick off Fiscal 2025. Although revenue came in just shy of estimates, earnings beat in a big way, with the company reporting EPS of $1.62 when only $1.02 was expected.
Revenue increased by 8.1% year-over-year, and although earnings per share decreased by 4%, this isn’t all that surprising considering the overall freight environment.
As I have mentioned numerous times in my main report on Cargojet, my main thesis here is a ramp-up in domestic shipping activity because of deliveries that could potentially be routed directly to Canada from China due to tariffs. This doesn’t mean that Cargojet won’t be exposed to an overall slowdown in freight demand. It just has a lot of tailwinds going for it when an eventual freight recovery happens.
One of the main things investors will notice right off the bat is the company had negative free cash flow of $45M. The market is not reacting negatively to this because it was announced by the company last quarter that there would be a lot of cash outlays this quarter due to some engine replacements and new fleet purchases to satisfy demand in China.
So, on the surface, it looks like a bit of an alarm bell. But I wouldn’t put too much emphasis on it as free cash flow can be volatile from a company like Cargojet due to the capital intensity of the business itself.
One core item I do want to highlight, and one that goes a long way in verifying my overall thesis with Cargojet
Domestic freight revenue. You will notice in the chart below that Cargojet follows a pretty predictable pattern. Q4 domestic freight volumes are higher, followed by a steep drop-off in Q1.
The interesting thing this year is that Q1 domestic volumes increased relative to the fourth quarter of 2024. Notice the red boxes I highlighted. Revenue spikes in December and falls off when they report in March. Now, look to the green box. Revenue increased in March.
I looked at Cargojets historical revenue in this regard, and I could not find another situation where this occured.
What exactly does this mean?
It means that domestic freight demand is increasing over and above the holiday season demand, which is abnormal. This is likely the result of not only the “buy Canadian” movement but also tariff-related issues that are driving more Canadian businesses and consumers to seek out goods that are internationally shipped to Canada and then domestically shipped to the end purchasers.
Previously, a lot of goods could have been shipped to the United States first and then to the end purchasers. Ultimately, this could create continued demand for Cargojet’s domestic shipping services.
The company mentioned on the conference call that tariffs create new charter opportunities for the company, especially through China. As long as trade tensions remain escalated between the US and China, Cargojet will likely continue to see more demand for shipping.
The company noted that they hadn’t noticed any substantial reduction in demand over the last couple of months that would be any cause for concern, but they also tempered expectations about the increase in domestic growth, stating that it is likely not sustainable. However, how sustainable that growth rate is highly depends on the policies of the United States, so I don’t blame them for being a little cautious there.
Overall, it was an outstanding quarter from the company, and the thesis remains well intact.
You can view my full report on Cargojet here
TFI International (TSE:TFII)
TFI International is an interesting one. While many investors panic at the cyclical drawdown of the company, I view it as nothing more than an excellent opportunity to add one of the best logistics companies in the country at discounted prices. Patient investors should be rewarded here when the economy picks back up. But again, I emphasize the word patience.
TFI International posted a rough but somewhat expected quarter to kick off Fiscal 2025. Revenue and earnings came below analyst expectations, with earnings missing by nearly double digits.
Revenue is up 5% year-over-year, but this is simply due to a large acquisition the company made in its truckload segment that is contributing to results. When we look to the bottom line of the company, we can clearly see the economy and trade tensions having a significant impact on results.
Look no further than the chart below, which highlights the company’s less than truckload (the bread and butter of the business) shipping activity.
Earnings per share have fallen from $1.24 to $0.76 compared to the first quarter of 2024, and operating income has fallen from $151M to $114M over the same time period.
The company’s less-than-truckload segment is continuing to see added pressures, with revenue dipping from $783M to $679M, and although truckload revenue increased nearly 50%, as mentioned, it is mostly acquisition-based.
Margin pressures continue
Margins are continuing to dip across the board as well, with less-than-truckload going from 10.9% to 6.9%, truckload 10.4% to 7.4%, and logistics 9.1% to 8.1%. The chart above will give you an idea on company-wide operating margins.
Margins are dipping primarily due to demand. When shipping demand is high, prices escalate and shippers are ultimately more profitable. However, when we get into an environment like we are right now and demand is much lower, logistics companies have to compete with the numerous other operators in the industry to grab the limited amount of business that is available, and as such, pricing needs to be more competitive which hits the bottom line.
The only benefit here is that TFI’s capital expenditures relative to its revenue are some of the best in class when it comes to logistics companies. Capital expenditures make up only 2.7% of its total revenue, allowing the company to maintain positive cash flow throughout this environment and either deploy that capital into acquisitions or simply shore up the balance sheet to weather this current storm.
Some key points from the conference call were highlights around their operating ratio, which they expect to escalate throughout the year but do plan to get it back to sub 90% range by the end of 2025. They are also scaling back their spending, now guiding to around $200M in capital expenditures versus their initial guidance of $300M.
This is likely in an effort to shore up the balance sheet and preserve capital, but I have little doubt that if an acquisition is attractive enough, they will pull the trigger. However, they mentioned they walked away from a promising deal this quarter simply due to uncertainty. So, they may be in complete preservation mode.
They mentioned that tariff uncertainty is really hitting demand, and ultimately, until all of this clears up, there will be lower demand for freight. They also issued Q2 earnings guidance, in which they expect to generate $1.25-$1.40 per share. Most analysts are expecting $1.40~, so I do expect those analysts to downgrade their outlook.
This company could remain discounted over the short-term, which is good for long-term accumulators
Overall, it was a rough quarter from the company, but it is positioned well to weather this storm and should be able to come out of it on top. This is the risk of cyclical stocks. They’re wonderful during the good times, but require a deep understanding of the business and some confidence in order to accumulate during the bad times.
You can read my fully updated report on TFI International here
Waste Connections (TSE:WCN)
A quick highlight on Waste Connections first. I replaced Canadian National Railway (TSE:CNR) for Waste Connections on the Canadian Foundational Stocks back in 2023. My prime reasoning was because CNR was a cyclical company heading into a likely economic downturn, while Waste Connections was nearly immune to a weak economy because of its business model.
Here are there returns since then:
Waste Connections came in with a rock-solid quarter, well above its expected guidance and also above analyst estimates. Revenue of $2.29B USD topped expectations for $2.21B, and earnings per share of $1.13 USD came in ahead of estimates for $1.07.
EBITDA margins of 32% also came in above what the company had expected, and overall, the bulk of this is simply due to strong pricing growth. Total pricing growth grew by 6.9% (see chart below.)
As I have mentioned with Waste Connections numerous times, its economic moat and ability to raise prices in practically every environment allows it to offset a decline in volumes.
Speaking of volumes, they declined practically across the board.
Overall volumes fell by 2.8%, recycling by 0.1%, and waste surcharges fell by 0.2%. In addition to this, the company had a 0.9% decline from some closed operations and a 0.7% overall decline in foreign exchange fluctuations. However, again, we look back to that core pricing growth of 6.9%, which more than offset all of this, to sit at overall growth of 2.2%.
Waste collection still continues to be the bulk of the company’s business, accounting for 72.5% of total revenue. This is where the company’s pricing power comes in the most, as there are few waste disposal operators that can operate at the scale that Waste Connections can. As such, it can charge what it wants, and people will pay to dispose of their waste, whether it be municipalities, home builders, industrial facilities, etc.
In addition to this, waste disposal and transfer, which arguably has an even larger economic moat than its waste collection, came in at 16.2% of total revenue.
The company has made acquisitions through the first 3 months of the year that should contribute around $125M USD to the top line, and I don’t expect the spending spree to slow down anytime soon when it comes to acquisitions, as these are certainly fueling growth at relatively attractive prices.
The company continues to grow by high-single digits despite a relatively weak environment for many stocks that are exposed to the economy’s cyclicality. Waste Connections is showing that it can not only operate in any economic environment, but also thrive.
