Not investment advice – Just educational and informational – Make your research before investing
Today, I’m gonna share a post about Titanium Transportation. Just keep in mind that most of the stuff here was written for myself back on November 11. Back then, I put together a thesis (and I still do) just for my own use.
Titanium Transportation is a trucking freight company that operates in the USA and Canada. It works as both a broker (without owning assets) and a truck-freight operator (with its own assets). They also provide tech solutions for logistics that make the user experience better and help improve profit margins.
Segments
Logistic
This is the broker segment, which doesn’t have assets but comes with fixed salary costs. It started operating in the USA back in 2019, and in recent years, it made up 60% of the total revenue (though it’s now dropped to 50%).
Even though this segment doesn’t need any capex, the margins are pretty low (around 6%, which is average for the industry) because of the high fixed costs. The expansion of this segment it’s so cheap: 250.000 – 300.000 to open a new office location.
This segment grew at a 16% CAGR from 2018 to 2024.
It’s worth mentioning that Titanium also sells technology under this segment. This tech helps boost the operating margins of truck businesses, strengthens customer relationships, and lets smaller players in the truck segment join the supply chains of big companies that need a higher level of tech compliance. This sound relatively not important or ignorable, but believe me that not and this is one of the most important differentiation of Titanium, and they explain this on this video.
Truck
This is the segment where the company owns its own trucks. It used to be the smaller part of the business, but now it makes up more than half of the total revenue. All the mergers and acquisitions (M&A) in recent years have been tied to this segment, and it makes sense since, as they say, it’s a super fragmented market where 87% of operators in the US have fewer than 6 trucks.
This segment has lower operating costs since it needs fewer employees and boasts a higher EBITDA margin (16%), but it’s also the segment with higher CAPEX investment.
It grew at a 12% CAGR from 2018 to 2024, and the management thinks a 20% EBITDA margin is doable (though, of course, it depends on the economic cycle – and management said this before tarif…).
Finance Review
Let’s take a quick trip through the company’s numbers before we dive deeper into the valuation and what’s ahead.
This include the discounted operations in net income
Revenue
Over the past 6 years, revenue has grown at a 16% CAGR, both organically and through acquisitions.
- In 2021, the company made two acquisitions: International Truck Load Services (ITS) and Bert And Sons Cartage (BSC). Thanks to these, the company saw a 53% growth in the Truck segment and a massive 120% jump in the Logistics segment.
- In 2022, revenue grew by 24.3% year-over-year, mostly because of higher price rates.
- In 2023, though, revenue dropped by 11%. This was mainly due to industry overcapacity, pressure on operating costs, and double-digit price declines. The Logistics segment got hit hard with a 14% decline, while the Truck segment actually grew by 32%, largely thanks to the acquisition of Crane, which contributed 66% to that growth.
- In 2024, entire company revenue grows ~5% (including fuel surcharge and discounted operations) mainly driven by logistic segment that growth ~10.6% YoY. In contrast truck segment that we see a decline if we
Around 90% of the revenue comes from fixed contracts. And as they say, they’ve got a big list of clients with no single one being too dependent on them, plus they’re spread across different industries.
What was the company expecting before the Trump tariffs? They were aiming to hit $1 billion in revenue in the coming years by making 1 or 2 big acquisitions like Crane, plus growing organically to expand operations to over 20 locations in the USA (they currently have 8).
Margin
As we know, we’ve got two segments with different operating costs and, of course, different operating margins (no big shock there).
Historically, the company’s EBITDA margin (I’m sticking with EBITDA instead of EBIT because of the high depreciation and amortization costs in the Truck segment) has averaged around 10.9%, hitting a pretty solid 12% at its peak. But for last year (2024), the consolidated EBITDA margin is expected to land between 8% and 10%.
And why’s that? Well, the whole sector’s facing some tough headwinds right now due to overcapacity. During COVID, with the crazy high demand for shipping, companies went all-in on extra capacity. But now, that level of capacity just isn’t needed. So we’ve got a perfect storm: lower volumes, lower rates, and higher operating costs thanks to inflation.
The Truck segment in the last quarter (Q3 2024) had a margin of 15%. Management mentioned it’s been hit by price cuts and the expected slowdown after integrating the new company (Crane). Before COVID, it was closer to 17%, with plans to push it up to 20%.
The Logistics segment also took a hit on its EBITDA margin (down to 6.5% this year from 9% in Q4 2023) because of these headwinds. But this segment still managed to grow organically by 18% year-over-year, thanks to a strategic price drop to pull in new clients.
Honestly, I don’t see a massive or alarming margin drop to freak out about. The 6% margin in the Logistics segment is pretty much in line with competitors like Landstar, and while 15% in the Truck segment is a bit lower, I think it could climb back to 17% (like it was before, without the new company integration). That’d put it close to Schneider International’s 18%, though still a bit below TFI’s 21%.
Update 2024FY: 13% EBITDA margin for truck.
Debt
Ohhh, debt has almost always been a problem for this company, and I think it’s one of the reasons for its low valuation and the negative views about it. The current ratio is at 3.5x for the 2024 fiscal year, which is high for a company that is cyclical.
In 2024, the company lowered its net debt from $197 million to $147 million (including leasing), which is impressive! It shows that the management is focused on reducing debt one proof of this is their decision to pause the dividend.
I expect the company will make an extra effort to reduce debt (and will benefit from lower rates in Canada) due to the dividend suspension.
Management
I have to point out that there are certain things I like about the management team. One is that they always make it clear they will use free cash flow to reduce debt, pay dividends (suspended), and buy back shares (the latter they have done year after year for example, in 2023, they approved a repurchase of 5% of the outstanding shares).
Within the company, they have a program where employees can buy up to 5% of their salary in shares, up to 9,000 Canadian dollars.
Also, the CEO owns 7% of the company and has a low salary, meaning he is quite aligned with the company’s interests, especially since he is the founding CEO.
Another good thing about the management team is that they are not overly optimistic. They generally speak with a lot of caution when discussing margins and growth.
Future and recap last announcements
Okay, I know the company had very poor performance in its share price over the last few years. I think this was because (excluding the recent tariff-war factor):
- Low margins due to overcapacity in the sector.
- High company debt (~4x EV/EBITDA).
- High capital expenditure (capex) investment due to truck fleet renewal.
What happened with each item?
- Low margins: It doesn’t seem like this will be fixed in the short term. Originally, the market thought this would happen (or at least start to improve) in 2025, but with the current Trump administration and the trade-war effects, we can expect overcapacity and low margins to continue.
- High debt: The company is focused on improving its balance sheet and could benefit from lower interest rates in Canada.
- High capex investment: This won’t happen in the coming years because their trucks are already renewed, and they don’t need to make this expense every year.
So, is everything fixed? No, my friend. As you know, there’s a major problem destroying the share price: the trade war.
What will happen with this? I can’t say anything because I don’t know. However, some sectors in the USA depend heavily on Canada, so maybe there’s a chance this won’t escalate too much. Another factor could be the Canadian elections, where a pro-Trump outcome seems likely. By the way, I always try to avoid making assumptions about politics or the economy when I invest in a company. If the company’s fundamentals are good, that’s enough for me. Of course, we can’t ignore the recession risk, which might keep the share price low for longer than I expect.
What does the company want?
When I first wrote this analysis and kept it to myself, I thought the company still wanted to expand its truck segment and focus more on its asset-based segment, ignoring an interesting company presentation. At around the 23:00 mark, someone said something like: “TFI is not a brokerage company. We are 50% brokerage and 50% asset-based. We are digital; we are a different model.”
This phrase might not seem interesting, but it is. It shows they are setting a direction for the company. They want to focus on their asset-light segment. In recent months, they’ve been expanding by adding new offices across different states in the USA.
Does this mean we won’t see another acquisition in the truck segment? Probably not in the coming years, due to the company’s high debt levels.
In conclusion: Titanium is focusing on its asset-light segment in the USA. This is very important for valuing the company.
Valuation
Originally, this company gave me an impressive annual return for next 3 years between 24% and 46%, with a stock price of $2.26 and a 3% dividend yield. But things have changed. Now, there’s no dividend, and the company still has a weak operating margin.
Then, shit happens and stock price fell to $1.34… dividend suspension and the tariff war.
How can I re-evaluate the company with all this uncertainty? I decided to make a valuation by estimating the growth and profit of each segment (instead of the whole company). This is important because the logistics segment will be the main driver of this company.
To do this, I created a sheet (Link to sheet) where I included the full income statement for each segment, plus some cash flow, balance sheet debt, and cash details.
Then, I projected growth using these parameters:
Important notes about parameters:
- D&A Over Revenue: This is a ratio I used to estimate the depreciation and amortization (D&A) costs. It has a big impact on the Truck segment.
- % Total Debt Payment through Interest: I calculated how much interest each segment pays compared to the total debt. That’s how I got this number.
- Net Debt Reduction Per Year (PY): This is a number I used to estimate how much the company reduces its total leverage each year.
With these, I made estimations for each segment:
Then this is the aggregation of both segment:
Estimated Free Cash Flow (calculated from EBITDA):
Estimated net-debt using the debt reduction parameter (5% it’s an average, can be higher due to lower Canadian interest rate):
Then, I used a simple valuation method with my estimated income statement, cash flow, and balance sheet. I applied a multiple, which I think is quite conservative. Here’s what I got:
Next, I used a Discounted Free Cash Flow (DCF) model:
Notes about parameters of discounted free cashflow model:
- Discount Rate = WACC (https://valueinvesting.io/TTR.V/valuation/wacc)
- Terminal Value = 5 (Multiple EV/EBITDA)
We get an intrinsic value of 1,55 CAD, which shows that the stock is undervalued at this price (1,34 CAD).
Conclusion
Right now, it’s hard to take action on this company. My estimations might still be too optimistic because of the current geopolitical and macroeconomic environment. If so, the company is a no-go for now. Or maybe my assumptions are balanced, which makes it interesting to open a small position and watch the company’s progress over the next year.
I already have a 10% position in my portfolio at 2.37 CAD, and it’s down 43% today. That was a beginner’s mistake: putting a full position into a cyclical company. It’s a lesson for the future.
I’ll keep my current position and track how the company performs. If I ever think it becomes a value trap, I won’t hesitate to accept the losses and close the position. That’s part of investing: if you can’t handle a 40% loss, you shouldn’t be doing this.
Thank you! Hope u enjoyed