Is XPO Logistics Stock a Buy?

Is XPO Logistics Stock a Buy?


XPO Logistics (NYSE:XPO) was a top-performing stock during the last decade, but shareholders have been taken on a bumpy ride this year.

The company has changed course twice in 2020 as the COVID-19 pandemic wreaked havoc on operations and strategy. The pandemic also caused second-quarter earnings to turn negative. And XPO has had a harder time pulling itself out of the ditch than many of its rivals.

XPO shares are up barely 5% for the year as of Sept. 22, and have remained largely flat even as other transport names have rallied in recent months.

FDX Chart

Transport data by YCharts

But that’s in the rearview mirror, and what matters is what lies on the road ahead. Here’s a look at XPO to determine whether the stock is a good buy today.

An impressive set of assets…

XPO is a $16 billion-sales transportation and logistics company with a diversified set of assets. The company is a freight brokerage, a large less-than-truckload shipping service, one of the world’s largest contract logistics providers, and North America’s top provider of home delivery for bulky goods.

There are a lot of competitors in each of those areas, but no single company that looks exactly like XPO.

XPO has aggressively invested in technology, spending about $500 million annually to build out a suite of products that management believes will make it a preferred choice for customers. XPO Connect is a cloud-based digital freight marketplace that connects shippers and carriers, helping to bring down freight costs and fill trucks.

XPO truck drives through city

Image source: XPO Logistics.

XPO Direct, meanwhile, is a nationwide shared-space distribution platform for retailers. It is designed to help customers offset the scale advantages enjoyed by Amazon.com.

XPO’s results were hit hard by the pandemic, pushing the company into the red in the second quarter. But the company still expects to generate “at least” $350 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) in the third quarter, up from $172 million in the second quarter.

Longer-term, I believe the pandemic could help push business XPO’s way by increasing e-commerce and due to companies rethinking their supply chains and distribution strategies.

… But Wall Street doesn’t care

XPO was built largely on acquisitions, with CEO Bradley Jacobs using dealmaking to grow the company from a small regional brokerage into an international shipping giant. But in January, the company shifted gears from buyer to seller, announcing it was exploring selling one or more business units because investors were applying a so-called conglomerate discount to the stock.

The sale process was called off months later due to the pandemic, but the underlying reasons for the move remain. XPO’s parts are valued by the market at a discount to the valuations given to a lot of more focused transportation companies.

XPO today trades at an enterprise value (EV) roughly 9.4 times EBITDA. That’s a significant discount to pure-play comparables, including logistics specialist C.H. Robinson Worldwide, trucker J.B. Hunt Transport Services, or either United Parcel Service or FedEx.

 

EV/EBITDA ratio

C.H. Robinson

16.18

UPS

15.59

FedEx

14.26

J.B. Hunt

12.14

XPO Logistics

9.44

Data source: Wallmine. Numbers as of market close Sept. 22.

There are a lot of contributing factors to that valuation. Many other transport companies held up better than XPO in the first half of 2020, in part because XPO’s large European exposure meant the company was hit by two separate waves of the pandemic.

XPO critics also like to point to its $9.4 billion in debt, though it’s worth noting that that includes about $2 billion in operating leases that are both a financial obligation and assets that generate a return. XPO has no significant debt maturities before June 2022, giving the company ample wiggle room through the pandemic, and thanks to its variable costs it expects to be free cash positive in 2020 despite COVID.

Management’s solution prior to the pandemic was “If you can’t beat them, join them,” testing the market to see if its individual businesses would be more highly valued if out on their own. Given the continued valuation gap, I think it is likely XPO will restart the evaluation of strategic options in the months to come.

Is XPO a buy?

I believe XPO is a buy on its own, as the company should be one of the major beneficiaries of trends including the acceleration of e-commerce, the outsourcing of distribution, and a rebound in trucking demand. In August, the company also added two new senior operating execs with track records as cost-cutters, which suggests XPO has the potential to streamline and improve margins in the quarters to come.

As importantly, I view the decision to explore options as a sign that Jacobs and his management team are unsentimentally focused on shareholder value. It can be tough for CEOs to break up the empires they created, and that can cost shareholders. XPO is unlikely to fall into that trap.

XPO’s stand-alone outlook should be enough to get the shares moving higher. If not, the company can offer its parts for sale on the open market and see if they merit a higher valuation from a buyer. Either way, I expect the stock to go up from here, and believe XPO is a buy.



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