XPO Logistics (NYSE:XPO) has grown fantastically in recent years by aggressively acquiring related businesses. However, management recently announced its intention to pause its acquisition strategy in favor of repurchasing shares.
Motley Fool Asset Management's Bill Barker and Industry Focus host Nick Sciple break down how investors should think about this shift in strategy and whether the thesis has changed for the stock.
A full transcript follows the video.
This video was recorded on Feb. 28, 2019.
Nick Sciple: Management still remains bullish on the business' prospects moving forward. They just completed a $1 billion share repurchase that they put forward following the short-seller report you mentioned a couple of months ago. At the beginning of February, they just approved another $1.5 billion in repurchases. So, as you see, Bill, management continuing to double down on repurchases of the business in the face of what appears to be some troubles, how do you think about that as an investor, as someone watching the company?
Bill Barker: Two thoughts. One, a lot of the optimism in the company was, when it was going for over $100 a share back in October, not only were there good current numbers that the company had delivered on, but, looking in the rearview mirror, this was a company that had grown at the pace that it had grown and was talking about making additional major acquisitions. In fact, they had conducted a secondary within the last 12, 18 months, I can't remember when it was, to have some money available for an additional acquisition. They were talking about making an acquisition up into the $6 billion mark.
Well, that was a story that had attracted Wall Street analysts and investors consistently over the last seven years. And now, the company has really reeled that back in and said, "We're not going to be making any major acquisition." They had taken a pause on acquisitions as they looked for the right thing at the right price. And now, they're just buying back their shares with as much money as they can get their hands on, and they're taking out some debt to do that. They already had debt. They've been paying debt off in the last two years. You don't grow 100X without issuing shares or taking on debt, and they've done both. They've had a bunch of secondaries. They've taken on a lot of debt. Now, they're buying back shares. There's financial engineering. If that sounds negative, I don't mean it to sound negative. They have taken advantage of a high stock price in the past by having secondaries. They've taken advantage of cheap debt by issuing a lot of debt. Now they're, under their declaration, taking advantage of a low stock price. They have a pretty good track record for doing the right thing with shareholder capital, but this is not a strategy that does not come with some risk.
Sciple: Yeah. Definitely encouraging that management is still seeing value in their shares after the steep decline. However, this shift in strategy for what the business has been for the past five or so years is something that we'll have to see how things develop.
Barker: Yeah. We've owned this company in a couple of our funds for seven years. We were getting it back around $16 a share back when we were buying it in 2012. We've seen it be cut in half once before. That was in reaction to the acquisitions of Con-way and Norbert Dentressangle, which made the company -- previously, it was a very, very asset-light company, and that's very attractive because they can take advantage of a good economy, hire more people, get on the phones, use technology to put the shippers and the truckers together. But taking on the trucks, which they've done with these two major acquisitions, made them an asset-mixed business, but far more asset-heavy and far more cyclically exposed. So, the change in strategy led to the stock being cut in half. It rebounded from that. Tripled again, back to where it was in October.
Now, it's been cut in half again because in part, one, they failed to deliver on guidance; two, they've lost this major customer; three, they've changed strategy from "we're going to be an M&A king" to "we're going to buy back our own shares." And you've had a lot of, I would say, Wall Street enthusiasm around the story and the execution of the stock in part, one cynically could say, because they're a very good customer of Wall Street. They've had all these secondaries, they've had all these debt issuances, getting involved in M&A deals is good business for Wall Street and they've been a good customer. Part of the short-seller report that we talked about accused Wall Street of being in the bag for XPO and pumping up the stock price. Well, I think that XPO has delivered a pretty impressive story. But, it's also true that there are plenty of Wall Street firms that want to do business with XPO.
Sciple: Right. Definitely going to be an interesting story to see as the strategy develops over time. Given that they have navigated through such a strategy shift in the past and been able to maintain momentum, definitely encouraging for a shareholder.
Obviously, these things can create some volatility in the near term. But as we look out as true long-term shareholders at the trajectory of XPO moving forward, is the thesis still intact on the value proposition that XPO brings to an investor? Are you concerned about this short-term volatility?
Barker: It depends on what your thesis is. If your thesis is, "I believe that management," in this case, Bradley Jacobs, the CEO, "is a good allocator of capital and can see opportunities in terms of acquisitions, and then actually do the hard work of integrating these acquisitions in a way that most cannot," I think that's intact because he's still there.
Some of the other management have left in the last 18 months. So, if your thesis went beyond Bradley Jacobs, then you've got to identify whether the CFO, they're looking for a new CFO, they've brought in a new COO, the chief strategy officer has also changed in the last nine months. You have to determine what your thesis is. If your thesis is, "This is going to be a rapidly growing company," the thesis has changed. Right now, it is still growing, but it's not growing at anywhere near the pace that it was. So, you've got, probably, in the market, a bunch of growth investors getting out of the story and value investors looking at it right now. It's certainly not deep value, but it's trading at multiples below the comp group.
I think you have to compare it both against trucking companies and against truck brokerage companies. You have to do the work there. But I think at today's prices, it's going to find some value investors.
Sciple: Definitely will be an interesting story to follow as the narratives around the company change and, as you mentioned, the shareholder base of the company changes. Operating in this logistics industry, which as we mentioned earlier, with the emergence of e-commerce, is going to be a key cog in that trend going forward. Definitely an interesting company to watch in that space.