EFTA Document EFTA01387103

Deutsche Bank Markets Research North America Canada United States Industrials Trucking Industry U.S. Transportation Where we have conviction, and where we don't On the back of 4Q results we have increased conviction in our positive stance 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 this report to downgrade our rating to Hold and lower our price target to $115. Our company-specific thoughts are below, and see details within this note for our industry takeaways post results: • KNX - best earnings revision potential across our coverage universe: 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 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 the early innings of integration and cyclical recovery. Our bullishness is supported by highly accommodative cyclical and non-cyclical factors, such as high-single-digit growth in U.S. truck tonnage and contract rates, double-digit improvements in yield, and plenty of low-hanging cost opportunity at Swift. See Figure 1 within this note for our walk to mid- teens operating margin. • XPO- we see potential for very strong 2019 free cash flow: Our long-held positive stance on XPO has been predicted on accelerating revenue and free cash flow growth. Indeed, organic growth accelerated to +10.4% in 4O, and free cash flow has tripled in two years- from $211M in 2016 to expected $625M this year. In the context of this free cash trajectory, an exact tripling of equity value in a little over a year is highly explainable, if not conservative, as it implies little in the way of multiple expansion (i.e. equity value has increased almost exactly in-line with free cash flow). Our 2019 free cash forecast of $750M implies 20% yoy growth, with upside to 35% growth (to $835M) if current organic growth rates are sustainable- which we think is a realistic outcome given macro backdrop, e-commerce exposure, and the company's growth investments. From this standpoint we see a relatively quick trajectory to our $133 price target, which represents 40% add'l upside. See Figure 2 within this note for our 2019 FCF walk for XPO. • UPS - Downgrading to Hold (lowering PT to $115): Following 4O capex guidance- which was worse than even the most bearish expectations- Date 22 February 2018 Recommendation Change Arm( tAtalintia Research Analyst Seldon Clarke. CFA Research Analyst Nem, Watwir Research Associate Chils Snyder CFA Research Associate Key Citrepre Company UPS.N Target Price Rating 135.00 to Buy to Hold 115.00 NIL 0.00 22.00 to 20.00 LSTR.00 95.00 to 105.00 YRCW.00 21.00 to 13.00 WERN.O0 42.00 to 43.00 GWR.N 88.00 to 84.00 Soave* Cease/re era kin wc.h. Knight-Swift (KNX.N).USD48.30 XPO Logistics IXPO.NLUS093.99 Buy Buy FedEx Corporation IFDX.N).USD243.30 Buy Sa•cg ORSICIII the Sector valuation and risks We utilize PIE to value transportation stocks, with our target multiple assumptions heavily supporteray our discount cash flow models and sum of the parts (where applicable). Risks to the group include U.S. recession, weak industrial production, pricing, and management execution. 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) CONFIDENTIAL DB-SDNY-0089204 SDNY_GM_00235388 EFTA01387103