Downturns in share prices are an excellent way for investors interested in undervalued stocks. When stock prices dip below their intrinsic or potential value, investors enjoy considerable returns when share prices climb up again.
However, a significant decline in share prices does not always indicate that a stock is oversold. Quite often, a downturn in share prices brings stocks down to levels that are a closer reflection of their values.
However, identifying stocks to steer clear of can be challenging if you only consider year-over-year results. On paper, many companies might look like they are still doing well. A closer look at the company’s performance can show you an entirely different picture.
TFII International (TSX:TFII) is one such stock, trading 11.81% below its 52-week high but up by almost 40% year over year as of this writing.
The clearer picture
TFII stock is a Canadian transport and logistics company. Headquartered in Montreal, it boasts a $16.45 billion market capitalization. After missing out on its earnings indicated in its recent report, its share prices dropped suddenly.
The company’s operating income decreased from $166.4 million in the first quarter (Q1) of fiscal 2023 to $151.6 million in Q1 2024. The weakness can be attributed to unfavourable market conditions for transportation and logistics.
The company also reported a drop in its net income, which dropped to $92.8 million from $111.9 million year over year. Its adjusted net income decreased by $11 million, and its diluted earnings per share (EPS) decreased to $1.09 from $1.27 in the same quarter last year.
The net cash TFI stock generated also decreased by $31.4 million from the same quarter in fiscal 2023. The company’s latest earnings reported that it has far lower financial flexibility and overall liquidity.
The worst isn’t over
The significant decline in its earnings came due to a drop in performance across all its segments. TFII stock experienced an 11%, 4%, and 6% drop in its Package and Courier, Less-Than-Truckload, and Truckload revenues, respectively. With market conditions unlikely to improve, decreased volumes will continue hitting the company’s cash flow and profitability.
Another headwind for the company is the growing uncertainty caused by the upcoming elections in the United States. The U.S. market conditions have a significant impact on its revenues.
Many of its consumers are waiting for the November elections to conclude before they decide to continue shipments, leading to a lower demand and cash flows for the company. Combined with its recent acquisitions, its financial situation does not look like it will improve until demand is back up.
Foolish takeaway
The volatility and uncertainty regarding the company’s short-term future make it a tricky investment to consider. When share prices decline so much, many investors consider it an opportunity to buy on the dip and bank on a recovery to capture significant capital gains.
However, the possibility of further declines and dark, uncertain clouds on the horizon for the industry make it a stock that I will avoid for the time being.
