XPO Off-Loads Chief Operating Officer as Focus Shifts

The company's explanation for dropping its COO suggests an extended pause in dealmaking.

Lou Whiteman
Lou Whiteman
Mar 16, 2019 at 10:02AM
Industrials

XPO Logistics (NYSE:XPO) is cutting ties with its chief operating officer after less than a year, a fresh indication that the transport and logistics operator is altering its strategy after hitting a rough patch in recent quarters.

In a regulatory filing on March 11, the company said it had terminated the employment of Kenneth R. Wagers without cause. Wagers was hired in April 2018 in part to help the acquisitive company plot the next stage of its merger and acquisition (M&A) strategy. In a statement to MarketWatch, XPO said the decision to let Wagers go was made after the company moved away from pursuing acquisitions in favor of deploying capital for stock repurchases.

An XPO Logistics semitruck drives down a tropical highway.

Image source: XPO Logistics.

The news comes at a difficult time for XPO. Shares of the company lost 17.2% in February after reporting fourth-quarter earnings that fell considerably short of estimates, and have lost more than half their value in the past six months.

The quarterly miss was attributed to a significant drawdown by an unnamed large customer. That customer is believed to be Amazon.com (NASDAQ:AMZN), which has been in the process of moving much of its logistics operation in-house.

Check out the latest earnings call transcript for XPO Logistics.

An extended M&A freeze?

XPO's shift to focus on buybacks instead of acquisitions is not news, with the company following its fourth-quarter earnings release saying that the board had authorized a new $1.5 billion stock repurchase program to be funded with cash and debt.

But M&A is in XPO's DNA. CEO and rollup specialist Bradley Jacobs has used dealmaking to build the company from a $177 million-in-sales trucking brokerage into a $17 billion shipping behemoth in less than a decade. And Jacobs' remarks during the fourth-quarter earnings call gave reason for investors to hope the buyback focus would be temporary.

We love M&A. We have a very good track record of creating significant shareholder value through M&A. But today, even though we spent a lot of time -- we're getting very close to concluding a long search for a good M&A candidate -- the best M&A target is acquiring our own stock. And that's where we're going to deploy our resources for the foreseeable future, not on external M&A.

Wagers' departure at face value seemingly implies "the foreseeable future" is more than a few quarters, and suggests a reshuffling of the c-suite away from M&A.

Behind-the-scenes shipping drama?

It's possible there were other issues beyond M&A strategy that led to the executive shake-up.

In a research note following XPO earnings, Deutsche Bank analyst Amit Mehrotra suggested Amazon might have pulled its business from XPO ahead of schedule because it saw Wagers, who was hired from Amazon, expanding the XPO Direct business that provides retailers and e-commerce companies with integrated logistics, transportation, and delivery services. XPO Direct arguably competes with Amazon's Fulfillment by Amazon operation and should help non-Amazon retailers to better compete against the online giant.

An XPO-branded sorting facility.

Image source: XPO Logistics.

There have also been suggestions in the industry that Amazon's decision to pull business from XPO was retribution for the company hiring Wagers. Industry publication FreightWaves last month quoted an unnamed source who claimed Amazon asked XPO to "reconsider" its decision to hire Wagers, with the story noting, "It is unclear how the two sides left it, other than the fact that Wagers remains employed at XPO."

It's still unclear what went on behind the scenes between XPO and Amazon, or where that relationship stands today. But Wagers is no longer employed at XPO.


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Pull off the road for now

XPO is clearly a company in transition. This is the fourth major executive departure since last July, and the message that came with this exit makes its clear that the company, at least at this moment, is not the accelerated-growth story that most current holders bought into -- the one that over a 10-year period ending in 2018 delivered a return of more than 3,000%. Over the next few quarters we'll find out if it is a temporary pause or the new normal.

XPO Chart

XPO vs. S&P 500 10-year stock performance data by YCharts.

I'm holding onto my shares through this foggy patch to see how things look on the other side, but I'm not adding to my position at these levels despite the decline. XPO has an attractive set of assets and exposure to the large and growing e-commerce segment, and can benefit even without Amazon by being the logistics provider for all the brick-and-mortar and online retailers competing with Amazon.

A maturing, less M&A-focused XPO can still be a good business and a solid investment. But for now it seems prudent to hold off buying until we know with greater certainty where XPO is heading.