First casualty in the USA-Canada trade war

There are two major (ground, not rail) transportation companies publicly traded on the TSX.

One is Transforce, now TFII (TSX: TFII) and the other is Mullen Group (TSX: MTL).

TFII used to be mostly domestic and focused in eastern Canada, but now they are about 70% USA in revenues, with their masterstroke being the acquisition of UPS’s Freight operations in January 2021.

Mullen Group has been western Canada-centric and aside from a relatively small non-asset based logistics operation in the USA which they acquired a few years ago, they are primarily domestic Canada. Their initial evolution stemmed from the service of oilfield industries (pipelines, drilling and the like) to a very credible and profitable freight, LTL (less than truckload) and warehousing operation, with the original oil and gas logistics business being continually de-emphasized over time.

Both companies have excellent CEOs that are able to articulate, evolve and have good crystal balls to see where the future is headed.

Unfortunately, for Canada, it is very apparent from both companies they view Canada as a zero-growth market.

In TFII’s most recently quarterly report and conference call, in addition to reporting under expectations (the market swiftly took the stock down about 25%) they announced that they were going to move their corporate headquarters to the USA. The relevant snippet in the conference call:

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Ken Hoexter (analyst)

Okay. And then just to re-domicile. Any tax implications on that? Is that just moving headquarters? Where are you going to be moving? Is there any follow-on implications for that?

Alain Bedard (CEO)

Ken, I think this is an evolution of TFI. So if you look at 5 years ago, we listed TFI into the New York Stock Exchange. And we were able to do that through what they call an NGDS, okay, exception, right? But this exception will disappear the minute that our shares that are owned by U.S. shareholders okay, the minute that we go above 50%, then this is not going to work. So we have to go to the SEC and then we have also to be U.S. GAAP.

So it’s part of an evolution, okay? But at the end of the day, if you look at TFI today, okay, for head office. We have people working in Canada. We have also people working in the U.S. We have people in Montreal, in Toronto, Calgary, we have people in Chicago. We have people in Minneapolis.

So we are all over the place in North America with our head office crew. So to me, it’s just like an evolution, okay? Because our business is now today about 70% U.S. domestic 25% Canadian domestic and about 3% or 4% or 5% transborder. So it’s just — and with the next M&A, okay, we just announced a small transaction in our MD&A with that and with the possibility of us doing some more M&A in the U.S., like we said at one point, we will invest $3 billion to $4 billion. It’s going to be in the U.S. It’s not going to be in Canada.

So our revenue will creep up to about 80% to 85%. So it’s just an evolution, but we’re not moving head office. We’re not moving people from, let’s say, Toronto to, I don’t know, Chicago. Every member of the TFI head office is staying where they’re at. So that’s what we call TFI, TFI International. It’s because we’re a Canadian and U.S.

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We look at Mullen Group’s conference call and the relevant snippets are here:

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Walter Spracklin (analyst)

Okay. No, I appreciate that color. On — in your outlook this year, you put $150 million in there for M&A that you’re going to allocate toward M&A. I don’t think you’ve done that before, Murray. And is this because you’re more — like is this something you see imminent, or is it just something that you’re kind of plugging in there because you’ve done it in the past? I’m just curious as to why you elected to include that? And do we assume it’s spread out across the year?

I’m trying to gauge your $350 million because if $350 million in EBITDA is $150 million in M&A investment, then that could be maybe $30 million of your EBITDA forecast for this year is associated with M&A. And if you do a deal at the end of the year versus at the beginning of the year, obviously that $30 million is going to vary. So I’m just trying to get a better sense of — do we look at your guide as being kind of more $320 million and then anywhere from $0 million to $30 million in acquisitions, depending on when you deploy it. Is that the right way to look at your guide for this year?

Murray Mullen (CEO)

Well, I think if you assumed — I think the reason we put in the $150 million is because the auditor told us we had to. So it’s just full disclosure is that it had to do. The auditors are all panicked because of tariffs. Oh, my God, the world’s going to end. No, it’s not going to end, but the auditors — I think that all came from them and then said, well, how do you get to that? Well, we’re not changing our outlook because we said, look, if we’re going to get — we think we’ll get to $350 million, but we got to do acquisitions to get there because we don’t think the market will give us $350 million. We think the market will be about the same as last year.

Just like we — I highlighted, for 3 years we’ve been $2 billion, $2 billion and $2 billion. Well, it might be 4 years because I don’t see any growth in demand. So let’s assume that we’re about the same on same-store sales. And that’s about $330 million. That’s about what we did. Of course. $330 million, $335 million, pick your number and then we do acquisitions. And I said, well, we’ll probably get to [ $23 million ] and $350 million. But we didn’t do any acquisitions out of the gate, it’s just the timing. So, but to get to $350 million, most likely we got to deploy $150 million of all that dry powder that we’ve got.

So, yes, I mean, if you’re doing acquisitions, you got to deploy capital. And if we’re going to add $300 million of revenue or $200 million, you got to spend some money. So that’s the math on it. That — that’s our — no, I think the question is, where are we going to spend it? Where are we going to invest shareholders’ money? Well, most likely it’s not S&I, or we’ve always said we love the LTL business and if we can find tuck-in acquisitions, we’re doing them because that’s how you drive margin improvement as you get more critical mass and you put your technology in play.

But I’d tell you, depending, I’m being coy right now, but it really depends on Canada’s response to how we’re going to be competitive with the Americans. If Canada doesn’t get its act together, and by this I mean the politicians and Canadians to say, we’ve got to invest and get capital coming into Canada, we’re going to turn our attention to the U.S., which implies our U.S. segment, U.S. 3 business.

So I don’t know for sure, but I can tell you, Canada, get your act together or on behalf of our shareholders, I’m going to put our money to work in the U.S. where we think if they’re going to win, we got to follow the money. So I think a lot has to do with public policy, Walter and they better start — they better bringing getting capital employed in Canada again if we want to get this economy to grow. That has nothing to do with me. I’m just pointing out the obvious.

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David Ocampo (analyst)

Murray, I just want to circle back on one of your last comments there on capital deployment. If you guys would start to direct that more to the U.S. If Canada doesn’t get their act together. If I look at your strategy so far, it’s mostly just been asset light through the 3PL business that you guys do have. So are you thinking something more of the same in terms of capital deployment if you do start to deploy more assets down in the U.S. or are you thinking something on the asset side, which would probably require a lot more scale than you’ve deployed in the past?

Murray Mullen

Well, I think David, that’s all under discussion right now, and we’re going to present our thesis to the Board. I’ve been reluctant on it, but when things change, you got to change. And it’s pretty evident with the Trump administration that — well, there’s 2 things. Number one, it’s pretty evident Canada’s losing the capital investment game already. Just look at our Canadian dollar, it’s worth nothing. And then if the Trump administration accomplishes what they want, which is they win and we lose, well, we got to follow the money. So we’re looking at that very, very closely David, I don’t know for sure yet, but I have to change my thought.

If Canada is not a place to deploy capital, I’m not going to deploy it here. It’s no different than in 2012 from a strategic standpoint. The rules changed in the energy space. We were once dominant in the energy business, S&I, oilfield service. Okay, well it changed and we pivoted away from it. I hope I don’t have to pivot away from Canada, but I got to do what’s best for our shareholders. And if pivoting away is required, our shareholders should know I’m going to do what’s best for them.

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There were other lines in the call, but you get the idea – when CEOs of companies that are major leading indicators of economic activity (freight transportation is one of them) are basically saying that they’re not going to be dumping any more capital into the country, you know there is a huge problem.

TFII’s corporate HQ move to the USA is an evolution and part of their strategy they likely foresaw a decade ago, and now Mullen Group is slowly getting into this game as well. As productive capital drains away from Canada, it makes the Canadian bargaining position continually weaker. Please note when I say “productive capital”, I mean capital in the form of machinery, manufacturing and most importantly human innovation – what I do not mean is capital in the form of real estate development, something we already have in huge excess!

I believe the Harper administration saw the big picture when it came to negotiating position and the necessity of attracting productive capital investment (e.g. at one point our corporate tax rate was significantly lower than that in the USA) – and indeed there was one point where we had US entities parking capital into Canada. With the growth of taxes and regulatory compliance costs (both soft and hard), needless to say the only entrants of any scale that come here are done so with the explicit backing of government (e.g. green energy project subsidies, or significant tax credits for film companies) as in most cases this is the only way that such investment is economically viable.

The net result of this is that unless if you are being assisted by the tailwinds of government, it will be difficult to make money. As governments are not known to be efficient capital allocators and are very susceptible to influence, this makes society less efficient and poorer as a result. Initially, the degradation is not noticed, but over time the economic neglect is increasingly more noticeable – post-Covid it became really obvious and this disparity will continue to get worse and worse. Brace yourselves!

Suncor firing on all upgraders

The turnaround in Suncor (TSX: SU) after Rich Kruger took over has been remarkable. It has almost been like a Hunter Harrison story.

Financial metrics at Suncor have been as good as it gets, with 2024 generating about $9.5 billion in cash flow, or $8 billion if you make some adjustments for working capital.

Using the $8 billion figure, Suncor has 1.25 billion shares outstanding, so $6.40/share in free cash flow. Market value is around CAD$55/share at present.

The balance sheet is mostly de-levered with about $7 billion of net debt. They intend to keep it at around the $8 billion level.

The capital allocation after capital expenses is currently going toward an approximate $3 billion/year dividend and the rest of it dumped into a share buyback.

If Suncor was trading as an income tax-free income trust like in the old days where income trusts were freely traded, they’d be generating about 15% distributions on their cash flows. With a 23% combined federal-provincial tax, that goes down to about 11.6% net on market cap.

At $55/share, the buyback is an acceptable use of capital, especially when measured against the cost of their 10-year debt (5.6% pre-tax at present).

The risks are fairly well known – regulatory (although the pendulum is definitely swinging on the environmental policy front), geopolitical (Suncor is relatively better positioned than Cenovus with respect to potential US tariffs on crude), and the commodity market (will oil crash?).

The biggest risk is that they spend money on a really stupid acquisition. Their most recent large profile acquisition (consolidating the remainder of the Fort Hills oil sands project from Teck and Total Energies) was a remarkably good one.

On the flip side, the upside is fairly contained – the company is operating at capacity.

Hence the valuation dilemma – will there ever be a catalyst to warrant a valuation that takes the company from ~12% after-tax to 10, or 8%?

It is too cheap to sell, but since zero growth and volatile commodity companies tend to be out of vogue at present, too expense to purchase.

Still, in theory, if everything remains equal, by this time next year, the company’s shares plus the dividend distribution should take the total value of a share purchased today at $55 and turn it into roughly $61, a lot better than a risk-free 3% on short term cash.

From an engineering and operational perspective, Suncor is a very exciting company doing really amazing things with gigantic volumes of dirt and water – it is truly a modern version of energy alchemy they are performing. Few people appreciate the magic that is being performed with these energy companies.

Financially, however, they are starting to resemble REITs. Whether this is a good or bad thing, I do not know.

I remain long on a moderate position taken shortly after Kruger took over. I am not expecting fireworks from this position, but take solace in having some degree of exposure to perpetually rising prices and having something better than cash silently raking in those free cash flows.

Thoughts re: Tariffs, Politics, Economics and the Markets

There are so many moving parts going on that it is very difficult to distill what is going on in a few short soundbites. There are political and economic considerations at play, in addition to geopolitical considerations that go beyond Canada and Mexico.

Strategically, Canada is in poor condition to fight a trade war with the USA, primarily through neglect but also through various acts of commission that have worsened the situation. There are significant political fractures in the traditional (Quebec vs. the rest of the country, and also increasing western alienation from Ottawa) domains but also a newer type of political vector which can be vaguely categorized as strong foreign interests (whether state-owned, or quasi-state owned) that want to steer Canada as a launchpad for their own interests. While this has existed before in the past, in the modern era this influence is much easier to remotely project due to globalization, the acceptance (whether coerced or otherwise) of immigration and the ease of communications via the internet. In the case of China, Canada is the closest analogy to what Cuba/Nicaragua was for the USSR in the 1960s to 1980s, and various interests from India are fighting proxy wars in Canada for leverage in India’s domestic conflicts (few have questioned how the leader of a junior parliamentary coalition partner propping up the current government has well known involvement in India’s affairs to the point where India banned him from visiting) – including the allowance of a plurality of Canada’s inbound immigration from that country. There are other foreign interests too numerous to mention, but needless to say the overriding concern with the current government is maintaining domestic incumbent interests while any concern shown for overall public welfare is usually ancillary to the entrenchment of very well-known entities in Canada.

Reference:
(Scotiabank – Canada trade briefing, January 31, 2025)

Economically, Canada imports and exports nearly a trillion (CAD) a year, split 80/20 with products/services, and about 75% of its export trade flows to the USA. Just less than half of Canada’s imports are from the USA. Canada’s GDP is approximately CAD$3 trillion so the fraction of the economy that depends on trade of some sort is immense. Given that a quarter of Canada’s GDP flows to the USA, while roughly 2% of USA’s GDP flows to/from Canada, there is a huge disparity between the economic dependence of both countries to each other. Putting it lightly, the USA has the ability to inflict 10x as much economic harm to Canada than the other way around.

This disparity in the relationship has historically been reconciled with historical geopolitical cooperation (in particular with the cold war with the USSR) and generally shared values. These factors of historical cooperation have more or less faded, with Canada not being particularly interested in defence policy of any sort (mostly abdicating its own responsibility and letting the USA handle defence), coupled with the Canadian government dabbling with international players that are adverse to US interests. These factors have been an acid that has corroded away links between the two countries and have indirectly facilitated the political ease of making tariff actions.

The reasoning for the tariffs is cited as illegal importation of Fentanyl across the border, while a very real concern, affects the southern US border much more than the northern border. However, this is to facilitate the tariffs themselves as a result of the Canada-US-Mexico free trade agreement ratified in 2020.

The only leverage of any economic consequence Canada has is the production and export of fossil fuels. About 20% of Canadian exports are energy products and the substantial majority of it goes to the USA. The USA has a fossil fuel deficit of about 7 million barrels of oil a day and much of its refining infrastructure is geared toward the processing of heavy oils, which Canada conveniently provides – Venezuela was the alternate provider for this type of crude oil, but geopolitical relations have been (pun intended for those that understand crude oil parlance) sour. As I write this, that oil gets sold to the USA for a significant differential, roughly US$60/barrel while WTI trades at US$73. Given the price inelasticity of crude oil, it is likely that the bulk of the tariff costs will be passed down.

Because Canada did not develop competitive export capacity away from North America, or even domestically (one of the country’s many economic acts of self-sabotage was to kill Energy East) there is a huge economic dependence to exporting oil to the USA. Conversely, if oil exports were to stop to the USA, the USA would find it very difficult to source crude oil on short notice and energy costs would materially rise domestically.

Finally, there is the consideration that Ontario and Quebec’s fossil fuel infrastructure is entirely dependent on imports – either from the Atlantic or via a pipeline which goes through the USA (Enbridge Line 5). As Ontario and Quebec consist large of the “incumbent interests” that I referenced previously, an attempt by Canada to curtail fossil fuel exports would likely result in a retaliation of export controls by the USA, causing massive disruptions in fuel supplies. As much as the Liberals find Alberta to be a political wasteland (and indeed punish Albertans for this reason to curry votes in Ontario, Quebec and the Atlantic provinces), even they realize what a catastrophe would ensue if oil were curtailed to the eastern Canadian refineries.

Politically, both Canada and USA are advantaged by a conflict, but for different reasons.

In Canada, we have a very unpopular Liberal government which would be decimated in the polls if an election were to occur, coupled with two other political parties that would go from having some power in the House of Commons to no power in the event the opposition Conservatives form a majority government. This is the reason an election will be postponed until the last nanosecond legally possible unless if polling circumstances change. A trade war is a great event to occur for a change in polling circumstances. “Never let a crisis go to waste” is the cliche, and as we have seen in the past, governments have taken conflict and used well-tuned persuasion techniques to stir up public emotions to great advantage – it was not very long ago when a federal election was called in September 2021 and the wedge issue was essentially the politicization of Covid-19, vaccinations, travel restrictions and the like. In both Canada and in British Columbia (October 2020 snap election) it worked.

Justin Trudeau gets rightfully pilloried for many reasons, but one thing that he excels at is acting and this is a ready-made moment for him to come out as some sort of hero of Canada for daring to fight Donald Trump, garnering public sympathy and with it a shot at revitalizing his party’s polling numbers as Mark Carney steps into the Prime Minister’s position. There is pretty much no political option for them at this point other than to engage in a purposefully escalatory and inflammatory strategy and the intention is to make Canadians suffer badly, citing it is something that the Americans did rather than a result of Canada shooting itself in the feet multiple times. They will make the argument that Canadians have no choice but to vote Liberal to show their solidarity against Donald Trump. Will this strategy work? They don’t have anything else to try at this moment.

However, the province of Ontario has already jumped the gun and called an election, with its premier declaring himself to be the defender of Canada. As Canada’s largest province by GDP and population, you can be sure the federal Liberals will be watching this election closely, although the provincial competitors to the incumbent governing party are a complete mess at present and not likely to get their act together by the February 27, 2025 election date.

One big problem to impede the settlement of the Canada-USA trade war is the current version of the Liberal Party is ideologically and spiritually in alignment with the Democratic Party – it is no secret at all that Justin Trudeau and the Liberal Party, after the 2020 presidential election, have been incredibly dismissive of Trump and mostly recently have campaigned in support of Kamala Harris and the Democrats (even after the 2024 presidential election, Trudeau lamented how the US public was not progressive enough to elect a female president). This has massively compounded the problem for Canada as one of the motivators for Donald Trump’s actions is to punish his political enemies – the current Government of Canada is considered to be a political enemy of the Trump administration until there is a change in the ruling political party.

On the USA side, we have what can be classified as President Donald Trump attempting to perform in 2024 what he wanted to set out in 2016, but with the benefit of plenty of experience of now knowing what to do to navigate through the “swamp”. Just as the “swamp” attempted to imprison him and his allies, culminating in an assassination attempt, my suspicion is that the President is motivated by getting back against his enemies (specifically the Democratic establishment), but also with a culmination of economic factors that align with US interests, including the on-shoring of industry to the USA and essentially trying to break the economic interests that were favoured by the Democratic establishment.

It is also not mentioned that tariffs themselves are a tax, and the implementation of a 25% tariff on all goods and services will generate a not trivial amount of taxation revenue. There are “multiple birds with one stone” with regards to both the economic and political consequences in the strategy they are pursuing, albeit one with a large amount of risk entailed.

This whole strategy of the Americans works as long as the domestic US economy has an ability to adapt to rising import costs, and that the US Dollar remains the global trade currency – indeed what we are seeing is a US dollar that is stronger than ever despite all of this going on.

One thing to always question is what we do not see going on – in particular, the USA has remained quite silent with Japan despite having a relatively large trade deficit with Japan. It could be because the Japanese LDP government is supportive of Trump (Shinzo Abe and Trump reportedly had a good relationship and there is no reason to believe that the current Prime Minister has a relationship like anything Trudeau has with Trump). Also little mentioned is the additional +10% tariff on Chinese imports – and I suspect one of the geopolitical targets of this whole action is to force China’s hand in some manner – including sending a message in regards to fentanyl.

In terms of the marketplace, whenever there are volatility events like these, correct and well-timed speculation will lead to outsized risk/reward outcomes that typically do not occur during ‘peacetime’ markets. While this tariff move was telegraphed well in advance (and the markets have had time to brace for impact), what I do not think the markets are appreciating is the continuation of these tariffs for longer in addition to the escalation of them – in particular, the Canadian government has too much of a political incentive in sustaining and escalating this conflict. Brace yourself, as Canadian purchasing power is going to get worse and the acceleration of the decline in our collective standard of living will continue for the foreseeable future until the country addresses its strategic weaknesses. What we are seeing happen is simply a symptom of a core problem of lack of investment and productivity and robustness in our domestic economy – all of this over-investment in real estate development does not make for a strong economy without having a sufficient amount of other building blocks in place.

As a reaction to this, the Canadian government will use it as an excuse to spend and “invest” – in their incumbent-friendly stakeholders. There will be some “tariff subsidy bonus cheques” given by the Canadian government to lower income individuals (this will be the substance of the deal the NDP will cut with Mark Carney to survive) and the result will be a significantly increased deficit (well beyond the projected amounts) and the currency will drop further than what we have seen – the currency value is the only escape valve when interest rates are being lowered to the zero bound. The Bank of Canada has already lowered interest rates and removed quantitative tightening, but they are likely to take it one step further and resume QE again once they have finished lowering the policy rate. They will be careful to not fuel inflation by ensuring the deficit spending is kept within the financial system and only fuel asset inflation, not consumer price inflation (the lesson from Covid-19’s CERB, CEBA, etc. was learned here).

This is a very fluid situation and I feel like the tip of the iceberg has been written in this essay and there will inevitably be changes to this outlook going forward. I’m remaining liquid, nimble and patiently observing where most of the panic breaks – there could be opportunities resembling a milder version of what happened in March 2020 coming up. Unfortunately, just as the March 2020 decision to shut down the entire economy showed, as a whole society, we will become poorer.

Implementing a Bitcoin Treasury Strategy

Divestor Investments Inc. has announced a strategic shift in its treasury management to strengthen its balance sheet and create long term shareholder value. We are adopting Bitcoin investment as a treasury reserve asset, joining a global community of forward-thinking companies leveraging digital currencies.

Just kidding!

Actually, it was Goodfood Market Corp (TSX: FOOD) that announced the same today.

The Company has completed an initial Bitcoin investment of approximately $1 million through a spot Exchange-Traded Fund (ETF) and plans to strategically increase holdings by investing part of future excess cash flows in Bitcoin. “Accumulating Bitcoin aligns with our long-term focus on value creation, protects against inflation and rising food costs, and leverages its potential as digital capital,” said Jonathan Ferrari, Goodfood’s Chief Executive Officer. “Goodfood is proud to join the ranks of public companies holding Bitcoin on their balance sheet.”

What is interesting is that they will probably be creating shareholder value (by creating a selling opportunity for existing shareholders) with this announcement in an attempt to become the next Microstrategy (along with all the others trying to piggyback on the same concept). The stock is up about 8% today.

Goodfood, as of September 7, 2024 had about $24 million cash on its balance sheet, but also $6.2 million in debt payable March 31, 2025, $29 million payable March 31, 2027 and $12.7 million payable February 6, 2028. Perhaps this is part of a “Hail Mary” strategy to pay off the debt when Michael Saylor manages to talk up Bitcoin to US$1,000,000 per coin.

Corporate Class Canadian Cash ETF – well above NAV

I have discussed cash ETFs before (tickers: CASH, PSA, CSAV, etc.) and they are all fairly cookie-cutter – they invest cash into banks and distribute interest income.

A unique product is HSAV, which is a corporate class cash ETF, which means that investors functionally receive their gains in the character of a capital gain instead of interest income. It charges an MER of 8bps higher than “regular” cash ETFs, but this is more than offset by tax savings in non-registered accounts.

Quite some time ago the ETF sponsor decided it would no longer sell units of the ETF because the accumulation of assets would exhaust their ability to write off expenses amongst the whole ETF class. As a result, the market price of the ETF has always had a floor price (where the ETF would repurchase units below NAV) but there was no theoretical ceiling.

The premium to NAV has oscillated between close to NAV to ridiculously high premiums above NAV and these swings have been quite unpredictable.

Currently the premium to NAV is about 90 cents (NAV at $114.03 and market price of $114.93 as I write this), which represents approximately 101 days of interest accrued – i.e. if you invested at $114.93 and the price collapsed to NAV immediately, you would have to wait 101 days before the ETF broke even.

You can generally see the moments where HSAV has traded well above NAV by looking at the trendline – noting that as Bank of Canada interest rates have decreased over the past half year that the slope of the increase of the NAV has correspondingly decreased:

What was an interesting time was in the winter of 2023, where the ETF was trading over $2 over NAV and this was over 5 months’ interest – anybody investing in this ETF at 107 (late February 2023) had to wait about five months before they could break even.

I don’t know how much higher this can go, but it really makes you wonder who is bidding up what should ordinarily be a very boring ETF!

I will also note the US currency counterpart (TSX: HSUV.u.TO) is trading a couple pennies above NAV and has only rarely exhibited this characteristic of trading more than a month of interest above NAV.