After a break in my earnings emails due to an addition to the Bull List (Cargojet – You can read the full report here) we’re right back into the thick of it with my commentary on Premium-highlighted companies that have reported earnings.
Typically, this is the newsletter portion where I would review my portfolio activity on the week. Unfortunately, I’m still waiting for my money to be transferred to Questrade in order to capitalize on the deposit bonuses they are currently offering. Thus, I’m stuck and unable to do anything.
With the markets south of the border going through the volatility they are right now, I may get lucky enough to catch some lower entry points when I do gain access to my capital.
Donald Trump is, to put it lightly, all over the map when it comes to policies and enforcement of tariffs. The markets hate uncertainty, so it’s not all that surprising that the NASDAQ lost more than 7% in a single week.
As I’ve always said, as long-term investors, we should welcome volatility to the downside. Although the last few years have been outstanding in terms of returns, once we acknowledge the fact that bear markets are a part of investing and those decreased markets will eventually recover, we begin to welcome the bear movement. Slumped markets allow us to accumulate high-quality companies at lower prices, ultimately leading to higher returns in the future.
If you’ve been a member here for any length of time, you know that I tend to focus on simply what I feel will be the best companies to hold over the long term, and I tend not to fuss too much about current events and macroeconomics. Sometimes, you just need to accept the fact that you cannot control any of that. What you can control, though, is accumulating shares of outstanding companies at attractive valuations.
Of note, next week will be one of our most anticipated releases of the year, our bank earnings recap! Stay tuned for that.
Earnings
TFI International (TSE:TFII)
I am putting this one first because I know without a doubt it will be the most popular. The company has fallen drastically in price over the last week or so, and many investors have questions.
TFI International posted a rough fourth quarter, one of the weakest from an estimation standpoint I’ve seen the company report in many years. Revenue of $2.08B came in just $100K shy of estimates, but earnings per share of $1.19 missed expectations of $1.57 by a wide margin.
TFI’s operations have held up exceptionally well considering the economic circumstances, so I’m not really all that surprised to see it report a quarter like this. Ultimately, the company is cyclical and heavily dependent on the economy and the North American consumer overall.
When we look to less-than-truckload revenue, it declined by 9.7%, and logistics revenue by 12.9%. Its truckload segment saw revenue increase by 73%; however, pretty much all of this was due to its acquisition of Daseke.
When we look to operating income on its less-than-truckload segment (chart below), it fell by over 47%. Interestingly enough, an analyst commented on the company’s conference call that he thought the number was a typo.
The company’s less-than-truckload segment does make up a large chunk of the business, which is also much more exposed to consumer spending. Because these are smaller shipments (often a wide variety of items on a single truck), a lot of it has to do with the shipping of retail goods and not necessarily industrial or commercial goods.
As consumers dial back spending and pinch pennies, there will no doubt be downward pressure on activity. If you are a shareholder of TFII, you need to be willing to accept this, and expect it.
On a full-year basis, the company didn’t perform all that bad. Revenue is up by double digits, although again, the bulk of it was through acquisition, and earnings declined by mid-single-digits. However, it is likely the market is going to react to the less-than-stellar earnings in the fourth quarter. On the year, the company earned $5.75 per share, while annualized, fourth-quarter earnings would only work out to be around $4.76.
Free cash flow remains relatively strong, sitting at $768M on the year, a negligible decline from 2023. This allowed the company to repurchase around $43M in shares and issue $33.1M in dividends. However, operating margins certainly took a hit, coming in at 8.8%.
This is the lowest operating margin the company has posted in quite some time.
The main focal point for this quarter: are we seeing the start of much softer shipping demand in North America, or is this a one-off. I would argue the answer lies somewhere in the middle. I
believe any sort of pricing weakness from TFI over the next year or so will prove to be a strong opportunity to add shares at a discount. Eventually, economic activity will pick up and consumers will start to open up their wallets again. TFI is positioned to not only survive the current environment it is currently in, but thrive in an inevitable recovering economy.
You can read our full (and new structure) report on TFI International here
Equitable Bank (TSE:EQB)
Equitable had a strong rebound quarter, which should alleviate any fears investors had when it posted arguably its softest quarter in a while last quarter. Revenue of $332M topped expectations by $16M, and earnings per share of $2.98 came in $0.22 higher than estimates.
The company reported provisions of $18.6M (see the chart below), which was right inline with analyst and company expectations.
If you’ll remember, provisions came in substantially higher than what was expected in the fourth quarter of 2024, which is what spooked the market and ultimately hit Equitable’s share price. Multiple quarters like this would have no doubt impacted sentiments toward the bank, but it looks like a one-off based on some poor equipment loans.
The company’s earnings per share increased by 8% year-over-year, and although this is still a solid number, it is not what we are used to seeing from Equitable Bank. Although provisions were inline with expectations, they’re taking a bit of a bite out of earnings at this point in time. However, this isn’t unique to Equitable. This is the case with most banks here in Canada. What matters most is that they’re under control.
The company continues its torrent pace of customer additions, now sitting at over 536,000.
On a year-over-year basis, this is a 26% increase, but only 4% on a sequential basis (comparing to last quarter). The likelihood here is the fact that deposit-based accounts like GICs, the Notice Savings Account, or even their savings accounts are not as attractive as they once were prior to interest rates declining.
Although this is certainly nothing to worry about at this time, I do begin to wonder how much of a slowdown we will see in terms of new customer additions now that savings products are not all that attractive.
The company’s CET Ratio came in at 15.5%, well above regulations and well above most of the Big 6 Banks here in Canada. From a liquidity and high-quality capital perspective, Equitable is doing just fine. Book value sits at just shy of $80/share, which is 12% higher on a year-over-year basis.
The company is reporting a steady increase in payroll-based customers, which is a good sign. These would be customers that have issued some sort of direct deposit into their accounts. These types of customers are likely to be stickier and not just at EQ Bank to take advantage of deposit bonuses or higher rates. This was definitely a thing during the higher rate environment. Have a look at the chart below, and notice how quickly deposits were rising when rates were high and how they’ve slowed now that rates have declined.
Overall, there wasn’t much to say outside of the fact the company needed to come through with a strong quarter after a relatively soft one last time, and it did. We are starting to see customer growth lag a bit relative to pandemic numbers.
However, this isn’t all that surprising considering how attractive savings accounts and fixed-income investments were in a higher policy-rate environment. The company will now need to grow its products through traditional means, likely value-adds when it comes to accounts so that customers stick around for the long term and execute basic banking needs.
You can read our full (and new structure) report on Equitable bank here
TELUS (TSE:T)
With TELUS being a Value Call here at Premium, I know people like the earnings coverage and the update on my position. The company is up more than 18% off December lows, but I am in no rush to sell this company right now, as I do see fair value much higher than levels today.
TELUS reported a strong close to Fiscal 2024. Revenue of $5.33B topped expectations of $5.23B, and earnings per share of $0.25 came in well ahead of estimates for $0.217.
For the full year, TTech operating revenue came in higher by 1.8% and adjusted EBITDA by 5.5%. Free cash flow came in at $2B (see the chart below.)
All of these numbers were near the low end of their guidance. However, considering the current operating environment and other telecoms missing guidance targets, I’d view this as a strong sign the company was able to come within targets. If we look to free cash flow generation since 2022, it has been on a steady uptick.
The company’s TTech segment, which includes many of its non-mobile segments, is fueling most of its growth. On the mobile end of things, the company continues to struggle. Average Revenue Per User in its mobile segment came in at $58.10, which is a 3.1% decline on a year-over-year basis, and overall churn rates increased to 1.5% from 1.4% in December of 2023.
These struggles are not unique to TELUS but to all Canadian telecom companies. The only main difference here is that TELUS has other verticals for growth, while the other telecoms do not.
Many telecoms are being faced with some pretty stiff headwinds when it comes to their mobile phone segments. For one, Canadians are pinching pennies in light of a substantial cost of living crisis. As a result, many are holding onto devices longer, getting out of contracts, and demanding lower rates on BYOD plans. Look no further than the chart below, which highlights Apple’s iPhone sales. There has been a slowdown for years.
Secondly, population growth is slowing in Canada, which is ultimately impacting the rate of customers they can acquire.
I want to primarily focus on the 2025 targets the company issued, as they are one of my core theses for a short to mid-term hold for TELUS. The company primarily issues its guidance in relation to its TTech segment, as it is the faster-growing segment for the business. They expect revenue to grow by 2-4% and Adjusted EBITDA by 3-5%.
In terms of the core pieces of guidance I have been waiting to see, the company expects capital expenditures to come in at $2.5B and free cash flow of $2.15B, which is about a 10% increase over 2024’s levels. The interesting thing here is capital expenditures in 2024 came in below their issued guidance, so I expect they can get them below in 2025 as well, which should help free cash flow generation.
I had expected free cash flow guidance to come in above the $2.15B issued. I had expected, at minimum, $2.3B, which is what is needed for dividend coverage. However, I would imagine the company is being somewhat prudent when it comes to guidance, considering the current economic environment and hurdles it faces in regulatory issues (population growth, competition, immigration policies, etc).
This is double-digit growth in terms of free cash flow, and while many of the other telecoms continue to struggle, TELUS seems to be the best from an operational standpoint. A few strong quarters early on in 2025 could add fuel to the company’s share price, which has rebounded nicely off of lows.
Overall, it was a strong quarter from the company, which is seeing its non-mobile growth segments shore up the company during a harsh environment. The diversification of growth verticals has been my core thesis with TELUS for quite some time. We are witnessing the symptoms of the opposite, such as with BCE, which does not have these additional growth verticals and is facing some significant downward pressure in terms of share price, and many pundits are now calling for an overhaul of management and a cutting of the dividend.
You can click here to read my full (and new structure) report on TELUS
