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The Secret of XPO Logistics' Success

By Dan Caplinger - May 3, 2018 at 1:36PM

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Find out where the logistics company has gotten the most growth lately.

For most people, the job of getting things from point A to point B isn't something they think about that much. Yet XPO Logistics (XPO -2.15%) has made it its business to care about what happens with products between manufacturing and final purchase, and thus far, one of its most successful traits is its simple ability to adapt to changing consumer preferences in how they bring products into their homes.

Coming into Wednesday's first-quarter financial report, XPO investors expected that the company would continue to carry strong momentum from the holiday season into 2018. XPO's results were solid, and the logistics and delivery services provider believes that there's even more opportunity for growth not just in the immediate future but for years to come. Moreover, XPO gave some hints about what it wants to do to ensure its continued success.

White tractor trailer truck with XPO logo driving down the highway.

Image source: XPO Logistics.

How XPO Logistics started 2018

XPO Logistics' first-quarter results reflected ongoing good conditions in its industry. Revenue was higher by 18% to $4.19 billion, outpacing both XPO's growth rate in the fourth quarter of 2017 and the 11% gains that most people following the stock were expecting. Adjusted net income more than doubled to $80.9 million, and that resulted in adjusted earnings of $0.61 per share, well above the consensus forecast for $0.51 per share.

XPO's two primary segments switched places in terms of their relative contributions to the company's overall performance. The logistics unit posted the stronger revenue gain for the period, rising 23%, as the company saw demand for e-commerce contract logistics as well as from North American industrial customers and European fashion retailers. Foreign exchange rates were favorable during the period, adding to sales performance. Operating income for the segment climbed by nearly half from year-ago levels, and XPO credited site productivity improvements in offsetting higher costs due to the implementation of new contracts.

The transportation segment still did well. Revenue for the unit climbed 16%, as XPO attributed the rise to higher freight brokerage and last-mile services in North America, dedicated truckload transport in Europe, and the weaker U.S. dollar compared to most European currencies. Segment operating income was higher by 32%, helped by more efficient operations in the less-than-truckload area in North America.

CEO Brad Jacobs was quite pleased with how the year began. "We're off to a strong start in 2018, [and] our 11% organic revenue growth reflected a healthy diversification of customer verticals and service lines," Jacobs said. The CEO also noted margin improvement in key areas and the impact of e-commerce demand on its overall success.

What's next for XPO?

XPO knows that e-commerce is the secret of its future success, and it's doing everything it can to take full advantage. As Jacobs put it, "We're making disciplined investments in innovation and sales to propel long-term growth." In particular, the rollout of XPO's digital freight marketplace and smart warehouse platform will let customers take advantage of voice integration in order to use the company on a self-service basis. Moreover, with XPO booking just under $1 billion in new business during the quarter, the company has $3.6 billion in its pipeline, up more than 10% in just the past three months.

Those disciplined investments will probably include modest acquisitions. Jacobs has said that XPO could use debt issuance to accumulate $6 billion to $8 billion that it could then use for strategic purchases. On this quarter's conference call, the CEO stated that XPO could make one large or two medium-size acquisitions by the end of 2018.

XPO didn't give any new updates to guidance, saying only that it still believes it will hit its previously stated financial targets for the full 2018 year. Those include calls for at least $1.6 billion in adjusted pre-tax operating earnings, along with free cash flow of about $1 billion.

XPO investors seemed generally pleased with the news, and the stock climbed 2% in morning trading on Thursday following the Wednesday evening announcement. E-commerce will be the driver for XPO's long-term growth, and so far, the opportunities in that space still appear to be nearly limitless.

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