XPO Logistics Inc. (XPO, Financial) is a global third-party provider of transportation and logistics services. It is the second-largest provider of freight brokerage and contract logistics in the world. It is currently trading around $115 a share and has a market capitalization of $13.75 billion. Approximately 63% of revenue comes from transportation, with the remaining 37% coming from logistics.
XPO serves a wide range of markets, both sectorally and geographically. Its 50,000 customers work in industries as diverse as retail, e-commerce, food and beverage and consumer packaged goods. About 60% of revenue is generated in the United States, with a further 13% coming from France and 12% from the United Kingdom. All in all, the company operates in 32 countries with 1,466 locations and over 95,000 employees.
A strong start to 2018
Over the course of the last year, the stock has traded up a staggering 84% and has continued to deliver impressive results. Here are some noteworthy results from the first quarter of 2018. Revenue was $4.19 billion, up 11% year over year. Net income came in at $79.1 million, a massive increase from the $24.9 million in the first quarter of 2017. The logistics segment performed particularly well: total revenue for this part of the company was up 23% (totalling $1.4 billion) and operating income increased 44% (totalling $48 million).
Positives
We see a number of growth drivers for XPO going forward. First, additional investment in sales and technology has provided the company with accelerated growth in a number of markets. XPO is constantly innovating in a range of areas. For example, the company recently launched XPO Direct, a shared space distribution network that allows customers to share XPO’s technology, warehouses, cross docks and trucks for a fraction of the price that would be required to develop these capabilities in-house.
Another recent innovation is XPO Connect, a cloud-based digital freight marketplace that allows customers to easily pick and choose between various delivery options and to access all the relevant pricing information and business intelligence. They have also allowed their fleet and warehouses to integrate with voice assistants like Amazon’s (AMZN, Financial) Alexa. Management particularly credited these investments in research and development and sales with strong revenue growth in Europe (up 21% in the transportation segment and 29% in the logistics segment).
Second, the size of XPO’s potential addressable market is $1 trillion. The company’s revenues are currently less than 2% of this total (revenue for 2017 came in at $15.38 billion). Management sees an opportunity to steal some ground from smaller rivals who do not have XPO’s global presence through mergers and acquisitions. According to CEO Brad Jacobs, "it could be one big deal or two smaller deals...but the base case is that by the end of the calendar year we’ll have completed one or two of these." Assuming management chooses their targets wisely, this could be a huge opportunity for further growth as large international clients prefer to do business with logistics companies with a large multinational presence rather than smaller, locally-based companies.
Risks
There is a significant danger facing XPO, however. With U.S. unemployment at record lows, the country is experiencing a nationwide trucker drought, with the American Trucker Association reporting a shortage of 51,000, which is projected to increase to 100,000 by 2021. This problem is exacerbated by the healthy state of the U.S. economy, which has led to higher demand for transportation services, which has put further upward pressure on trucker salaries (already averaging $53,000).
That said, this could prove to be a blessing in disguise for XPO as its size and proven track record in cost-cutting through technological innovation might give it an edge over smaller, less-advanced competitors in the U.S., allowing the industry to consolidate around the big players.
Verdict
Management is confident in its ability to increase XPO’s share of the global pie through M&A activity and continued investment in sales and technology. The nationwide shortage of truckers could be the macroeconomic event that makes or breaks XPO as it enters this new phase in its history. Overall, we see a stock that is certainly not cheap, but definitely has room to continue to deliver good returns.
Disclosure: I/We own no stocks discussed in this article.
(This article was co-authored by Stepan Lavrouk, an investment analyst with Almington Capital - Merchant Bankers)
