XPO Logistics' Self-Help Efforts Running Into Cooler Sentiment

 

Writing about XPO Logistics (XPO) almost a year ago, I thought the shares offered upside on solid execution in a tight market for truck freight. Unfortunately, while execution in the brokerage operation has been good, the same cannot be said of the less-than-truckload business. On top of that, the less-than-truckload (or LTL) sector has definitely cooled since late 2021, with concerns about a peak in the cycle.

XPO shares have been a notable laggard, but management has stepped up to address the shortfalls in the LTL business with a multipoint plan to improve service quality and efficiency and drive growth in 2022 and beyond. I don’t see XPO becoming a top player in the space in terms of operating metrics, but given the current valuation they don’t really need to be. While I do have some ongoing concerns about sentiment and “fighting the tape” with investors seemingly having moved on from the sector, the valuation here is enough to get my attention.

 

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XPO Logistics' Self-Help Efforts Running Into Cooler Sentiment

Share Growth, Demand Growth, And Technology Opportunities Driving XPO Logistics

Between strong growth in e-commerce and outsourced logistics, share growth in multiple parts of the business, and ongoing efficiency improvements from tech investments, things are pretty much going XPO Logistics’ (XPO) way this day. Moreover, with ongoing share growth and efficiency gains still possible, I don’t think the operational improvement story is necessarily over.

It’s been a little while since I updated my thoughts on XPO, and since my last update, the shares have moved to the high end of the $100 to $120/share value range I saw then, modestly outperforming the S&P, while underperforming Old Dominion (ODFL) and J.B. Hunt (JBHT). Given the trends driving improved operating results (both internal and external), I think there could still be double-digit upside from here, and the spin-off of the logistics business could perhaps unlock more upside, as XPO shares do continue to trade below most sell-side sum-of-the-parts estimates.

 

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Share Growth, Demand Growth, And Technology Opportunities Driving XPO Logistics

XPO Logistics Shifts Gears Yet Again

Is there really any overarching plan in place at XPO Logistics (XPO)? I ask that because this company has shifted gears so abruptly so many times over the years, that transmission has to be pretty well stripped by now. First the company was going to be a roll-up of asset-light logistics services companies … then it became decidedly more asset heavy. And now management apparently is looking to (or at least willing to consider) auction off everything but the U.S. less-than-truckload business.

I shouldn’t complain – these shares are up 75% from my bullish call back in June (and were up about 50% before the announcement of the strategic review). And you know, if the overarching plan is to create maximal value for shareholders by whatever legal means necessary, that’s not so bad. Either way, with break-up values in excess of $100/share now in play and no real sense of what the long-term strategy is now, I can’t say I’m as bullish on the shares now.

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XPO Logistics Shifts Gears Yet Again

XPO Logistics Taking A One-Two Punch Of Slowing Macro And Persistent Business Quality Questions

When I last wrote on XPO Logistics (XPO) roughly a year ago, I wasn't all that interested in the shares due to what I thought was an overheated valuation. Little did I expect the chaos that would ensue, including a large M&A transaction that never happened, the loss of a significant chunk of business from Amazon (AMZN), significant high-level executive turnover, multiple EBITDA misses, and persistent questions regarding the company's working capital management and intrinsic growth capacity.

Although I still like XPO's less-than-truckload (LTL) trucking operations and I believe the contract logistics business may be underappreciated on its long-term leverage to e-commerce fulfillment, I don't like the debt-funded share buybacks, and I think the macro picture is getting more challenging. On the other hand, there's a sizable short position here and the market could reward performance that simply meets expectations in 2019. On top of that, today's valuation seems to only be anticipating low single-digit long-term FCF growth.

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XPO Logistics Taking A One-Two Punch Of Slowing Macro And Persistent Business Quality Questions

XPO Logistics Leveraging A Hot Freight And Logistics Market

One of the pleasures of following XPO Logistics (XPO) has been listening to the various and sundry comment section prophets of doom call for XPO's imminent collapse - back at $30, $50, $75, and so on. There have most definitely been some big corrections along the way, but management has demonstrated that not only can it assemble a high-quality broad-ranging freight and logistics franchise but also run it well. A debt-rich balance sheet, economic sensitivity, and a desire for more deals are all risk factors to varying degrees, but XPO has carved out strong positions in areas like truck brokerage, forwarding, less-than-truckload (or LTL) trucking, last mile logistics, and contract logistics.

Valuation is a much more significant issue for me now, though. Even if XPO Logistics can grow at a pace similar to what companies like Old Dominion (ODFL), J.B. Hunt (JBHT), Hub Group (HUBG), and C.H. Robinson (CHRW) have managed and push FCF margins into the mid-single-digits, the implied returns aren't that impressive, and the shares are likewise not all that cheap on a forward EV/EBTIDA business compared to a blended multiple based upon its end-market exposures.

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XPO Logistics Leveraging A Hot Freight And Logistics Market

Saia Heading Northeast And Looking To Unlock More Leverage

The last five years have been good to Saia (NASDAQ:SAIA), as this smaller less-than-truckload (or LTL) carrier has grown its way into a top-10 market position and seen its share price climb over 400%, trouncing ArcBest (NASDAQ:ARCB) and YRC Worldwide (NASDAQ:YRCW), and doing quite a bit better than Old Dominion (NASDAQ:ODFL) as well.

While the company's tonnage growth has been relatively modest (up less than 1% on a compounded basis since 2009), it has been able to improve pricing at a mid single-digit clip, while meaningfully improving its operating ratio by prioritizing better service and more efficient operations. Looking ahead, the company's expansion into the Northeast should drive meaningful revenue growth and help the company improve its operating leverage and asset turnover. The shares isn't like cheap today, though, so this looks more like a name for the watch list than a near-term buy.

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Saia Heading Northeast And Looking To Unlock More Leverage

Seeking Alpha: XPO's Painful Climb Toward The Top

It has been a little over a year since I last wrote on XPO Logistics (NYSE:XPO), and I'd like to say that time flies when you're having fun, but that's not the case. As it concerns XPO, the company has used that intervening time to take a very big step toward its goal of being a market share leader along the waterfront of logistics and freight service, but at the cost of significant investor angst and a sharp re-evaluation of the "right" multiple for the business.

The share's value has fallen close to 40% since I last wrote, and my $50-plus fair value at that time was predicated on the company remaining a growth-oriented asset-light third-party logistics company. Instead, the company has pivoted toward a much more balanced asset-heavy/asset-light mix. While that isn't necessarily a bad strategic move, it does change the long-term complexion of free cash flow generation, the volatility of those cash flows, and the multiple the market will be willing to pay for the shares.

There seems to be a recurrent communication issue between the Street and the company, and that concerns me. I don't know if it stems from management being more freewheeling and flexible in its long-term plan than previously thought, or whether there's more of a "making it up as we go along" element to it. In any case, while I do see meaningful value here, management has a lot of work to do to reassure investors about its long-term strategy and about the true synergies of mixing asset-heavy and asset-light businesses in the transportation and logistics space.

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XPO's Painful Climb Toward The Top

Seeking Alpha: Old Dominion Navigating A Bumpy, Pockmarked Road

When I last wrote about Old Dominion (NASDAQ:ODFL) in December of 2015, I was concerned that a slowdown in the broader U.S. economy was going to weigh on short-term sentiment of this top-notch less-than-truckload (or LTL) carrier. For about a month or so, that did in fact happen, with the shares dropping about 20% to their mid-January lows. Then the industrial rally hit, taking the shares back above $70, before cooling down into summer ahead of yet another small recent rally. All told, the shares are about 2% higher than they were at the time of that last piece - a little worse than Saia (NASDAQ:SAIA), but better than quite a few other peers/comps.

All of that up and down is a pretty good reflection of what seems to be going on in the economy. There are definitely areas of weakness, as manufacturing-heavy MRO distributor MSC Industrial (NYSE:MSM) highlighted recently, but it also seems to be true that the economy is not careering toward disaster. For truckers, it has been messy. The overall upward trend from 2014 is still in place, but there have been some tough months along the way, and the second quarter is not shaping up to be too pretty.

Stock opportunities like Old Dominion are why a lot of professional investors and analysts are grey before age 40. On the positive side, Old Dominion is probably the best-run trucking company out there (at least in the LTL space) and it still has room to grow to over 10% national share and improve its margins even further. It's also trading below its historical average EV/EBITDA multiple. On the negative side, the second quarter is probably going to be ugly on both a revenue and cost/operating leverage basis, and I don't think a big volume/tonnage rebound is in the cards until after this year.

Cyclical stocks like Old Dominion can get very weak during the doldrums, even while everybody acknowledges that better days will come again and the company will do well then. I find the long-term valuation pretty appealing, but this might be the sort of stock to buy in pieces (dollar-cost averaging) if you're concerned about the economy over the next six to 12 months.

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Old Dominion Navigating A Bumpy, Pockmarked Road

Seeking Alpha: XPO Logistics Continues To Find New Mountains To Climb

XPO Logistics (NYSE:XPO) pursues a business model that isn't going to sit well with every investor, but it has been a fun story to watch develop, as the shares are up another 50% or so from the time of my last article and 167% from my first article a little more than two years ago. In a short span of time XPO has used aggressive-yet-savvy acquisitions to build itself into a formidable third-party logistics provider with strong operations across freight brokerage, intermodal, expediting, last mile, and contract logistics. With the acquisition of Norbert Dentrressangle, XPO has the opportunity to take an already-successful model and extend it to Europe while also entering new segments of the logistics market.

The shares still look undervalued, but there's more than a usual guesswork that goes into this model. M&A is so critical to the story that I believe you miss a lot if you only assess the company on the basis of the operations it owns today. Of course, projecting M&A is tricky as you have to make a range of assumptions regarding deal size (revenue, EBITDA, etc.), valuation, financing structures, and so on. My process gives me a valuation range between $45 and $56, but I tend to think that $50-$55 is probably a good range to think about for the next 12 months or so.

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XPO Logistics Continues To Find New Mountains To Climb

Seeking Alpha: XPO Logistics Sticking To Its Guns

XPO Logistics (NYSE:XPO) is quite possibly one of the most controversial names I follow, with every article I write seemingly bringing more than its share of "I'll believe it if/when I see it" skepticism on the company's growth-by-acquisition plans. There is no doubt that management's strategy is exceptionally aggressive and the company has shifted (or perhaps broadened) its strategy from asset-light truck brokerage to a more comprehensive third-party logistics (or 3PL) portfolio.

There are good reasons to be skeptical of stories like XPO Logistics. Rampant M&A makes it harder to suss out the real underlying performance of the business and creates opportunities for accounting that runs from ambitious to aggressive to outright wrong. On the other hand, the shares are up more than 80% from when I first wrote on them and the 3PL sector not only offers good underlying growth but numerous consolidation opportunities. I won't dismiss the risk that this is a big game of musical chairs, but I know that Wall Street can't help itself when it comes to growth and XPO Logistics could have a great deal more of that in store in the coming years.

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XPO Logistics Sticking To Its Guns

Seeking Alpha: XPO Logistics' $7 Billion Revenue Ambition

It's almost surprising that XPO Logistics (XPO) hasn't made another major acquisition since I last wrote about the company in mid-January. I am of course being facetious, but not by much, as XPO management has shown an extreme willingness to identify, negotiate, and close deals that bring in new revenue and business opportunities to this fast-growing third-party logistics provider.

The investment thesis here still comes down to belief. If you believe that management will hit its goal of $7.5 billion in revenue and $425 million in EBITDA in 2017, these shares look quite cheap today, but ample risks remain regarding the company's ability to integrate acquisitions, manage the balance sheet, and drive those mid-single digit EBITDA margins. I don't have complete confidence that management will get there, but "close" is still good enough to make this a stock worth considering.

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XPO Logistics' $7 Billion Revenue Ambition

Seeking Alpha: XPO Logistics Sticking To An Aggressive Growth Plan

Every time I've written about XPO Logistics (XPO), I've heard from readers who simply do not believe that the company will succeed in its goal of buying or building its way into a leading spot in third-party logistics by 2016. Yet, the company continues to post strong organic growth and negotiate multiple M&A transactions, the latest being the acquisition of Pacer International (PACR).

Whether it's the bull market in general or a buy-in from institutional investors, the shares of XPO Logistics had a good 2013 and sit just below a 52-week high. Even with that strong performance, they don't appear to me to be unreasonably valued today.

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XPO Logistics Sticking To An Aggressive Growth Plan

Seeking Alpha: Expectations For Arkansas Best May Be Higher Than They Seem

National less-than-truckload (LTL) trucking company Arkansas Best (ABFS) has been one of the best turnaround stories of 2013, as a new Teamsters agreement with meaningful cost concessions gives the company a real chance to repair one of the worst cost structures in the industry. With that, the shares have rocketed up more than 200% this year, and 300% from the 52-week low.

Even with that major leap, it would seem that the company is not getting all its due. The shares trade at about 4.6x the current average EBITDA estimate for 2014, against a long-term average of about 4.5x and industry averages that often run in the 6x to 8x range. On the other hand, Arkansas Best could still be facing significant pension liabilities, and the company may find it difficult to meet some aggressive growth goals. All told, I'm intrigued by what Arkansas Best could become again, but it's for me to not still prefer the more richly-valued (but better-run) Old Dominion (ODFL).

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Expectations For Arkansas Best May Be Higher Than They Seem

Seeking Alpha: XPO Logistics Building Credibility In Aggressive Growth Targets

When I last wrote about XPO Logistics (XPO) in March of this year, I found the company's ambitions to be rather remarkable, but potentially very lucrative for shareholders. In the following four or five months, I didn't really second-guess my decision to "watch and wait" as the stock went nowhere fast. Then the company announced its largest-ever acquisition and the stock jumped to new highs before settling down a bit.

Six months later, it's hard not to like XPO Logistics even more. The company's combination of aggressive M&A and organic growth is building credibility that the 2016 target of $4 billion to $6 billion in revenue is attainable, not to mention the 5% EBITDA margin. A great deal could still go wrong between now and then and there are significant uncertainties about what the company's capital structure will look like at that point, but I think shareholders can still find meaningful value in these shares.

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XPO Logistics Building Credibility In Aggressive Growth Targets

Investopedia: J.B. Hunt's Bigger Challenge Today Is Expectations, Not Operations

The markets remind us over and over again that quality stocks often appreciate well beyond fair value, particularly when they become popular picks in attractive sectors. That would seem to be the case at J.B. Hunt (Nasdaq:JBHT), as it is quite difficult to call the stock's price a bargain by conventional means. While the Street's love for J.B. Hunt has been great for shareholders, it does come with a price, as expectations seem to be quite high for this well-run transportation company.

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Seeking Alpha: XPO Logistics Has Huge Ambitions, But Wall Street Has Real Doubts

It doesn't feel like a stretch to say that Wall Street loves logistics. From FedEx (FDX) to Hub Group (HUBG), from Landstar (LSTR) to JB Hunt (JBHT), most of this sector is trading very close to 52-week highs, even though economic activity in the U.S. has been pretty "meh" recently. While CH Robinson (CHRW) and XPO Logistics (XPO) are a bit further removed from their highs, I think the latter could be a very interesting opportunity even at these levels.

The ambitions of the XPO management team are nothing short of extraordinary - they aim to take a company that sits around the #20 spot in the U.S. truck brokerage with $280 million in revenue and grow it into the #2 player by 2016, with revenue in the range of $4 billion to $6 billion. That's an incredible goal and frankly Wall Street isn't buying it - or at least not showing a willingness to assume that XPO can grow at that rate and generate any sort of real free cash flow. If the Street is wrong and management is right, shareholders could be looking at a future multi-bagger here.

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XPO Logistics Has Huge Ambitions, But Wall Street Has Real Doubts