Why This Logistics Company Is the Best Proxy for Outsourcing Growth

How is it that smaller companies, like XPO Logistics, with a greater presence in high-growth segments and huge growth potential via M&A can be more attractive investment candidates relative to their larger peers?

Jun 25, 2014 at 9:58AM
Logoxpo

Source: XPO Logistics

Does size matter in third-party logistics? If the answer is a restounding yes, it seems straightforward to consider an investment in C.H. Robinson Worldwide (NASDAQ:CHRW), the largest freight brokerage firm in the U.S. and ignore smaller players like XPO Logistics (NYSE:XPO). In reality, things aren't that straightforward; XPO Logistics is an equally good, if not better, proxy for the growth in the third-party logistics industry.

Size matters
An estimated $350 billion is spent on the over-the-road trucking market every year, with brokers like C.H. Robinson and XPO Logistics having a mere 15% penetration rate. As shippers seek standby capacity in times of high demand and carriers try to eliminate fixed costs associated with staffing internal teams, the logistics industry as whole should benefit from outsourcing.

On the surface, C.H. Robinson, the North American market leader with close to five times the revenues of the next largest domestic freight brokerage firm, is the biggest beneficiary of the network effect. Shippers go to the largest freight brokerage firm, when demand is high and most carriers' capacities are full. C.H. Robinson has the largest contracted pool of capacity, with access to more than a million trucks. In turn, the profitability of carriers is heavily dependent on capacity utilization and access to the freight broker with the biggest client shipper pool will help to avoid under-utilization issues.

For anyone still unconvinced that scale is a critical success factor in third-party logistics, C.H. Robinson's results speak for themselves. It has grown its revenue and operating income by impressive CAGRs of 12.9% and 14.5%, respectively. In addition, C.H. Robinson was awarded an Inbound Logistic magazine's "Top 10 3PL Excellence Awards 2013". Its CEO and chairman, John Wiehoff, was quoted as saying that "our worldwide network of offices supports our core strategy of serving customers locally, nationally, and globally," effectively crediting its scale for its success.

However, there are two reasons why XPO Logistics is by no means an inferior investment compared to C.H. Robinson, despite the differences in size.

Firstly, there are niches within third-party logistics. While XPO Logistics is the fourth-largest freight brokerage firm in the U.S. behind market leader C.H. Robinson, it is the largest domestic provider of last-mile logistics for heavy goods.

Based on XPO Logistics' internal estimates, last-mile logistics is projected to grow five to six times GDP compared with a relatively inferior two to three times GDP expected growth rate for truck brokerage. Following the acquisition of 3PD and Optima, the biggest players in the last-mile sectors last year, XPO Logistics is well-positioned to capitalize on the surge in e-commerce-driven home deliveries.

The last mile, referring to the final leg of the supply chain where products are delivered to customers' homes, is a critical component of e-commerce. Given the emphasis that e-commerce users place on on-time delivery, XPO Logistics is expected to benefit tremendously from the outsourcing trend among e-tailers.

Secondly, the fact that XPO Logistics' revenues are only approximately 5% of C.H. Robinson's, should be viewed as a positive factor. This indicates that XPO Logistics has significant room for growth, particularly in the area of M&A. Both the company and management have had relevant track records with respect to acquisitions.

XPO Logistics has completed 11 acquisitions in the past two years and these newly acquired entities are expected to contribute at least $400 million in revenue for fiscal 2014, representing more than half of last year's top line. The fragmented nature of the industry and a strong deal pipeline are the two key drivers of XPO Logistics' M&A strategy.

It is estimated that less than 1% of the 10,000 licensed brokers in the U.S. generate more than $200 million in revenue, giving rise to consolidation opportunities. XPO Logistics has a dedicated acquisition team which has filtered the list of potential freight brokerage targets to 100 names and is in constant discussions with these companies about potential deals. XPO Logistics' CEO Brad Jacobs has completed close to 500 M&A deals with the prior four companies he started and worked at.  

Owner Operators

Source: XPO Logistics

Technology makes a difference
In addition to growing in scale, XPO Logistics also relies on technology to give itself the edge against larger rivals. It has a dedicated development team based in Cambridge that is focused on improvements in information technology. XPO Logistics has in place a common IT platform for all existing subsidiaries and acquired entities, complete with proprietary freight optimizer tools.

Examples include real-time market data on price and capacity visibility and detailed carrier & shipper profiling. As an illustration of XPO Logistic's commitment to technology, its information technology budget is estimated at $70 million for 2014, coming close to 10% of its 2013 sales.

Foolish final thoughts
XPO Logistics isn't the largest freight brokerage firm in the U.S. now, but it boasts greater growth potential than market leader C.H. Robinson. XPO Logistics is already the biggest player in the last-mile logistics space and has leeway to grow further via M&As in the truck brokerage market. In addition, its investments in technology help to level the playing ground with larger competitors.

Having achieved an average quarterly revenue growth rate of 26% for the past 27 months, XPO Logistics has set an ambitious target of expanding its revenues by 10-fold from 2013's revenues of $702 million to $7.5 billion in 2017. In my opinion, this is highly achievable, given the track record of XPO Logistics and its management.

Will this stock be your next multi-bagger?
XPO Logistics has every chance of becoming the next multi-bagger, if it meets its target of growing revenues 10-fold by 2017. Give us five minutes and we'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Mark Lin has no position in any stocks mentioned. The Motley Fool recommends C.H. Robinson Worldwide. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers