EFTA01387103.pdf

Deutsche Bank Markets Research North America Industry Date Canada United States U.S. Transportation 22 February 2018 Industrials Recommendation Trucking Change Where we have conviction, and where we don't Arm( tAtalintia On the back of 4Q results we have increased conviction in our positive stance Research Analyst on Knight Transportation (KNX), XPO Logistics (XPO) and CSX Corp (CSX). We remain comfortable with our sole-Sell ratings on Old Dominion (ODFL) and Canadian National (CNI), while our Buy on UPS was wrong and we are using Seldon Clarke. CFA this report to downgrade our rating to Hold and lower our price target to $115. Research Analyst Our company-specific thoughts are below, and see details within this note for our industry takeaways post results: Nem, Watwir • KNX - best earnings revision potential across our coverage universe: Research Associate For KNX we see potential for EPS to approach $3.60 per share in 2019, which is 30% above current consensus. This is based on 15% operating Chils Snyder CFA margin on 2019e revenue ex. fuel, which is 200bps better than what KNX-SWFT achieved on a consolidated basis in 4O'17- despite being in Research Associate the early innings of integration and cyclical recovery. Our bullishness is supported by highly accommodative cyclical and non-cyclical factors, Key Citrepre such as high-single-digit growth in U.S. truck tonnage and contract Company Target Price Rating rates, double-digit improvements in yield, and plenty of low-hanging cost UPS.N 135.00 to Buy to Hold opportunity at Swift. See Figure 1 within this note for our walk to mid- 115.00 teens operating margin. NIL 0.00 22.00 to 20.00 LSTR.00 95.00 to • XPO- we see potential for very strong 2019 free cash flow: Our long-held 105.00 positive stance on XPO has been predicted on accelerating revenue and YRCW.00 21.00 to 13.00 free cash flow growth. Indeed, organic growth accelerated to +10.4% in WERN.O0 42.00 to 43.00 4O, and free cash flow has tripled in two years- from $211M in 2016 to GWR.N 88.00 to 84.00 expected $625M this year. In the context of this free cash trajectory, an Soave* Cease/re era exact tripling of equity value in a little over a year is highly explainable, kin wc.h. if not conservative, as it implies little in the way of multiple expansion Knight-Swift (KNX.N).USD48.30 Buy (i.e. equity value has increased almost exactly in-line with free cash flow). XPO Logistics IXPO.NLUS093.99 Buy Our 2019 free cash forecast of $750M implies 20% yoy growth, with FedEx Corporation IFDX.N).USD243.30 Buy upside to 35% growth (to $835M) if current organic growth rates are Sa•cg ORSICIII the sustainable- which we think is a realistic outcome given macro backdrop, Sector valuation and risks e-commerce exposure, and the company's growth investments. From this We utilize PIE to value transportation stocks, with our target multiple assumptions heavily standpoint we see a relatively quick trajectory to our $133 price target, supporteray our discount cash flow models which represents 40% add'l upside. See Figure 2 within this note for our and sum of the parts (where applicable). 2019 FCF walk for XPO. Risks to the group include U.S. recession, weak industrial production, pricing, and management execution. • UPS - Downgrading to Hold (lowering PT to $115): Following 4O capex guidance- which was worse than even the most bearish expectations- Deutsche Bank Securities Inc. Distributed on: 22/02/2018 21:06:10 GMT Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX I . MCI (P) 083/04/2017. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0089204 CONFIDENTIAL SDNY_GM_00235388 EFTA01387103