INSIDE FREIGHT – FDX MACRO, DSGX AND CVLG ACQUISITIONS, PORT UPDATE, AND CP

The Wolfe Byte

Today’s Inside Freight note includes updates on: FDX’s latest macro forecasts, acquisitions from DSGX and CVLG, and a potential strike at CP. We also highlight recent improvements at the West Coast ports.

  • FDX Cuts Macro Forecasts. This morning, FDX lowered its macro forecasts across the board including a 40bp cut to its U.S. GDP forecast, a 50bp cut to Industrial Production and a 30bp cut to U.S. consumer spending (see exhibit 1 in the full note). Historically, FDX’s macro forecast cuts have coincided with periods of downward earnings revisions, so we see potential risk to F3Q EPS due to Omicron and weather.
  • Improvement at the Ports. The vessel backlog at the West Coast ports has declined meaningfully over the past couple weeks, and stands at 76 containerships today, down from a peak of 106 just a couple of weeks ago. We think this reflects seasonally lower demand, improved labor availability at the ports, and improving fluidity within the ports. The ports have made the most progress clearing smaller vessels out of the backlog, so the reduction in total TEU’s in the backlog is somewhat more modest. Regardless, there now seems to be clear signs that port congestion is starting to ease a little (see exhibits 2-3).
  • DSGX Acquisition. This morning, DSGX announced the acquisition of NetCHB, a customs filing software business. This marks DSGX’s first acquisition in ~8 months. DSGX is paying $40M of cash up-front, with a potential $60M earn-out if DSGX hits some aggressive growth targets. As DSGX starts to face tougher organic growth comps in the quarters ahead, we expect its pace of acquisitions to pick up closer to its historical 3-4 deals per year.
  • CVLG Acquisition and Stock Repurchase. This morning, CVLG announced the acquisition of AAT Carriers, an Expedited business specializing in highly regulated loads for the U.S. government. CVLG will pay $35M-$55M depending on earn-outs, implying a 3.3x-5.5x EV/EBITDA purchase multiple. Based on $25M of revenue and a ~35% operating margin, we estimate around $0.35 of EPS accretion (9% of our C22 EPS). So, this seems like a very favorable deal. CVLG’s Board also approved a new $30M share buyback authorization, or about 8% of shares outstanding.
  • Potential Strike at CP. The Teamsters Canada Rail Conference (TCRC), which represents more than 3K train & engine (T&E) employees at CP, served notice of a strike vote this week. CP and the union are currently in mediation, and a legal work stoppage can only occur 21 days after mediation ends, so a potential strike could happen in mid-March, at the earliest. Prolonged strikes are very rare and the last two TCRC strikes against CP lasted a few hours in 2018 and two days in 2015. So, we don’t view this as a big overhang on CP’s stock right now. We also discuss a potential tax refund for CP in the full note.

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