An Introduction to XPO Logistics and Rollups

By following an aggressive acquisition strategy known as a rollup, XPO Logistics (XPO 3.67%) has grown its revenue by 100 times in recent years.

In the following segment from Industry Focus: Energy, Motley Fool Asset Management's Bill Barker and host Nick Sciple discuss how Barker discovered XPO, the advantages and risks of a rollup strategy, and the basics of XPO's business.

A full transcript follows the video.

This video was recorded on Feb. 28, 2019.

Nick Sciple: This week we're answering a listener question from Peter F. Smith. He says he listens to way too many Motley Fool podcasts, has been investing since he was a teenager. He wants us to talk about XPO Logistics. He says it's a pick in one or more of The Motley Fool funds and ETFs. He just read their transcript from the last conference call and couldn't square what was said by management with the recent movement in the stock.

Well, Bill Barker is from MFAM Funds and has been falling XPO Logistics for a little while. Bill, before we dive into this company, when I was talking to you last week as we were getting ready to record this episode, you had a very interesting story about how you came across this company. It's indicative of how you always have to have your nose out for opportunity. Can you talk to us a little bit about how you first encountered XPO Logistics?

Bill Barker: Sure. I spend most my time on the funds that we have, MFAM Funds. Back in 2012, I went to a conference in New York hosted by Credit Suisse, I believe. Their normal conference mechanics are, there are a bunch of tracks where you go into one room or another to listen to management presentation. I had a certain presentation that I wanted to hear in one of the four rooms during the, let's call it the 02:30 to 03:00 block. Then, the 03:00 block, I didn't have anything that I was particularly interested in seeing, so I just stayed in my seat for the next presentation, which was XPO Logistics. And it was just a series of letters and the word "logistics." I thought it couldn't possibly be interesting, but easier to just stay in my seat than go walk into a different room.

It turned out that they were giving a presentation -- this was in 2012 -- on their plans for growth, and Bradley Jacobs' history in executing roll-ups in other industries, and the attractiveness of doing it at the time, strictly in truck brokerage. And the growth numbers through a roll-up strategy that they were projecting seemed hard to believe. I'll just say that what they've done since then is far bigger a growth roll-up strategy than they were presenting even back then.

Sciple: For our listeners who may not be familiar with what a roll-up strategy is and what it entails, can you explain that in general terms, for someone who's new to that term?

Barker: Sure. It's the acquisition of other businesses, either what you might call a tuck-in business, which is a small piece, to add to a large piece of what you've already got, or a major acquisition, which is transformative to the business. At the time, just to put some numbers around that, the company was doing, let's call it, $150 million a year in revenue. The plan was to grow to something billion over a period of time. Of course, they're a $17 billion revenue company today. That's roughly 100X growth. That's only achievable, in most businesses, through acquiring other businesses, rather than through purely organic growth. For the most part, organic growth is more attractive, growing your own business rather than paying up to acquire other businesses. I'll just say that for the most part, I wouldn't recommend pursuing companies that have a roll-up strategy. It tends to lead to empire-building. While it can be rewarding to shareholders, more often it is not.

Sciple: XPO Logistics, as you mentioned, has been very aggressive with that strategy. The number I saw is that between 2012, when you first discovered the business, and 2015, they acquired 17 U.S. and European businesses over that time. Can you talk about the industry in which they operate? XPO Logistics is a trucking and logistics company. You mentioned the logistics brokerage services. Can you talk about the kind of businesses that XPO has been acquiring and their strategy in doing so over time?

Barker: Back then, 2012, truck brokerage. What is that? That's basically being a middleman between the trucker and the company that needs goods moved. If they don't have their own fleet, and most companies do not have their own fleet -- of course, if you're driving around, you'll see a Pepsi sign, PepsiCo, on a truck, or any number of other major names, which have the capacity to move their own goods. But most companies are using somebody else to move their goods. Trucking companies, there are several large players, but more often it's a mom-and-pop operation. You've got, literally, the pop is usually the truck driver, and the mom is handling that side of the business on arranging some of the work. You've got to keep your trucks full. You've got to be out on the road. You build up a little fleet, maybe five or 10 trucks, something like that. That can be a good business. But you still have to have customers. XPO, on the truck brokerage side, is putting truckers together with merchants.

Sciple: Right. They mentioned in their filings they're the second largest freight brokerage provider worldwide, based on the value of freight under management. They've really grown significantly over time with these acquisitions.

Check out the latest earnings call transcript for XPO Logistics.