XPO Logistics Is Expediting Its Growth Plan

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Wall Street pros have nothing on retail investors who stake small sums of money monthly on undervalued small-cap stocks. Because they're mostly ignored by the big guns, these types of stocks offer the best outsize opportunities for growth.

I screened for stocks under $3 billion in market cap, offering earnings surprises of 15% or more in the previous quarter, with long-term earnings growth forecast to be at least 15%. One stock that floated to the top was third-party logistics specialist XPO Logistics (NYSE: XPO  ) , whose CEO has a knack for turning small growth stocks into major industry stalwarts. Its earnings jumped 22% ahead of Zack's analyst expectations even as they still expect its earnings to grow 40% annually for the next five years. With a $305 million market cap, it easily makes it into our range for potential investment candidates.

Of course, don't jump on a stock just for those reasons. It should just be a starting point for more research as we need to look more closely to see whether analysts' faith in it is well-founded.

Get it on the go
Despite a near 4% rise in the Dow Jones Industrial Average  in the back half of 2012, the Dow Jones Transportation Index is up just half of that over the same time frame. There's an investment theory that holds that without the latter at least keeping pace with the former, the economy is not as healthy as it might otherwise appear.

Still some transportation and logistics companies have done at least as well as the indexes, with shares of FedEx up 2% in the last six months, railroad operator Union Pacific up more than 8.5%, and trucking company Old Dominion Freight Line has risen more than 17%.

Yet there seems a lot to be worried about as UPS has fallen 2%, Norfolk Southern and CSX are both down around 10%, and Swift Transportation has tumbled 17%. The logistics shops like XPO and Air Transport Services Group are down, too, falling 5% and 25%, respectively.

Long road to nowhere
The problem is an economy weighed down by sluggish growth, along with Europe's financial house being in shambles and even China stumbling. And if the U.S. goes over the fiscal cliff as increasingly seems likely, Fitch Ratings estimates the economy will double-dip into a recession and unemployment will rocket to 10% again.

According to the Association of American Railroads, combined North American freight carload volume this year is down almost 2% over 2011 with nonmetallic minerals, coal, and grains down by double-digit percentages. On the other hand, petroleum products surged 50%, lumber was up 23%, and motor vehicles were up almost 14%.

A big umbrella
XPO has been trying to increase its market share in the logistics industry by rolling up rivals under its growing umbrella. It bought three companies this year each one getting progressively larger until its October purchase of Turbo Logistics reached $50 million.

It's not an unfamiliar road map CEO Bradley Jacobs is traveling. He took United Rentals from a small equipment rental company to a national force by buying up smaller shops and was doing the same thing with United Waste Systems until it was itself acquired by Waste Management. Typically the growth-by-acquisition strategy raises warning flags for me because of there are often problems integrating diverse corporate cultures. Acquisitions aren't a problem until they're a problem, but they do help a company grow in a hurry. Jacobs wants XPO to be a $4 billion to $5 billion company in just a few years' time, achieved largely through rolling up the industry.

The company admits several of its business segments are facing weak fundamentals, but because of the acquisitions it's making, it believes it is positioning them and the company as a whole for industry leadership.

A small price to pay
While there are risks inherent in the strategy its pursuing, it's hard to argue with the success Jacobs has generated in the past. It was one of the reasons why, upon his assuming the helm of XPO, I rated the logistics shop to outperform the market on Motley Fool CAPS, the 180,000 member-driven investor community that translates informed opinion into stock ratings of one to five stars. Since I weighed in on XPO Logistics a year and a half ago, the stock has soared 387% compared to an 8% rise in the S&P 500.

That might be slightly lower than the high points it hit in the past, but I expect XPO to recover, so I'll be maintaining my outperform rating on the stock. Let me know in the comments section below if you think that sometimes exceptions like XPO's acquisition strategy prove the rule that acquisition-crazy companies ought to be avoided.

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Read/Post Comments (2) | Recommend This Article (1)

Comments from our Foolish Readers

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  • Report this Comment On December 26, 2012, at 8:43 AM, anthony251998 wrote:

    Interesting piece. I've been invested in XPO for roughly two years now, several months before Jacobs took over the company. I am all for his strategy as he's been creating significant value for himself and value for other shareholders. He invested $150 million in the company and if he were to sell today should cash out somewhere in the $300 million range, a princely sum... If he did cash out today, I wouldn't be too happy since shareholders have not reaped the full benefit of the strategy. I admit, returns have been niceince I've bought my first shares, but somewhat volatile, and I've never sold a share. I've bought on several dips. However, one has to look at the future of the broader market and this stock relative to where prices are now. Transportation overall is still at a relatively low point in the cycle and downside is pretty low compared to the upside, especially considering a stock like XPO. Once the acquired XPO businesses are all aligned systematically, we should see good margin and earnings improvement. Also, at about 1.4x, P/B is low compared to FDX (1.9x) and UPS (9.4x) our much larger brethren. UPS is an anomalie right now at 9x Book. A stock like XPO should trade about 3-4x book in my opinion based on size and expected growth. For late 2013 into 2014 I'd expect improved fundamentals as well as multiple expansion (P/B) from 1.4x to 2.5-3x book value which should be higher by the end of 2013 and wouldn't be surprised to see the stock hit the mid 30's by year end. I know it sounds very optimistic, but even if the broader market crashes, I'm betting on flatline price movement for XPO with multiple expansion into 2014. I've made good money on it so far (roughly 60%), but have even higher expectations for the new year. Another note is XPO has only been on the NYSE for less than a year. Prior to that XPO traded on the less followed AMEX. NYSE should increase demand for shares at some point, another reason to believe in multiple expansion. By 2014-2015, I wouldn't be surprised to see Mr. Jacobs entertain offers as he'd probably see offers in the $1B range.

  • Report this Comment On January 05, 2013, at 3:09 PM, opirac wrote:

    With all respect company is loosing money, claiming growth in revenue but still loosing money.Stock seemsVERY overvalued for company that is loosing money and or buying customers.When they start paying dividents thats when i may become interested, untill than i wont buy stock and put my money on line so company can grow.Good companies as for exemple as Microsoft do have Billions in banks for aquisitions if and when they find company worth of buing.

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