Transportation giants XPO Logistics (XPO 0.48%) and FedEx (FDX 1.20%) have both been stuck in neutral of late, with shares of XPO down 32.9% over the past year and FedEx shares performing only slightly better, down 23.6%.
The reasons vary, but each company can blame a mix of geopolitical headwinds, higher costs, and operational shortfalls for their troubles. Although these two companies occupy different parts of the transportation and logistics business, their fortunes are both tied closely to global trade. And they both face daunting new challenges brought on by e-commerce giant Amazon.com.
Both FedEx and XPO have come back to life somewhat in 2019, with shares up 15.9% and 12.5%, respectively, but each are still trailing the S&P 500's 16.4% gain for the year.
So which company is a better choice for an investor looking to put new money to work today? Here's a look at the issues both companies have had, and their outlooks for the future, to determine which is a better buy.
The sputtering roll-up machine
XPO has gone from overachiever to underperformer in just the past few quarters. CEO and roll-up specialist Bradley Jacobs used dealmaking to transform this company from a $177 million-in-sales trucking brokerage to a $17 billion shipping behemoth in less than a decade, producing a 3,000% return on the shares during a 10-year period ending mid-2018.
Unfortunately, a significant portion of that gain has evaporated since the beginning of October, when XPO was the target of criticism from short-seller Spruce Point Capital. The company's issues were compounded in February, when it missed on earnings in part because of weakness in Europe, and said its largest customer was taking its business in-house.
XPO shares have been stuck in traffic for the past six months. Image source: XPO Logistics.
That large customer is believed to be Amazon, and XPO admitted it will take time to fill the gap that Amazon is creating. XPO on May 1 reported mixed results but said it closed a record $1.1 billion in new business during the quarter, the first step toward proving to investors it can get back on track.
Jacobs, during a post-earnings call with investors, admitted, "We made a mistake letting one customer get $900 million of business with us," adding, "It's just too much concentration." For 2019, XPO expects its top five customers combined will account for just 7% of total sales, and no customer will account for more than 2% of revenue.
XPO has a broad portfolio of offerings, and the company's growth strategy relies on cross-selling different services to existing customers. It seems to be having some success. XPO said that its 26 largest less-than-truckload customers use, on average, five additional XPO services. Ninety of its top 100 U.S. customers use two or more services, and 55 of the top 100 use five or more services.
For all its drama, XPO remains a profitable and growing company, forecasting 3% to 5% revenue growth in 2019 and adjusted EBITDA up 6% to 10% while increasing free cash flow by $100 million year over year to $625 million. The issue is that growth is a far cry from what investors have grown to expect from XPO. With the company hinting that it is taking an extended break from M&A, it's hard to imagine the previous levels of growth returning anytime soon.
High costs and trade tensions
FedEx has had its own share of problems over the past year. The company in March reported quarterly results that fell short of expectations, and cut its fiscal 2019 full-year profit forecast for a second time.
FedEx has been fighting slowing global trade and weakness in its international Express business. The company also reported higher costs domestically as it continues to roll out year-round, six-day-per-week ground delivery operations in the U.S.
FedEx shares have been stuck in the loading zone. Image source: FedEx
Company chairman and CEO Fred Smith on a call with investors said FedEx had started the year hoping for a $6 billion revenue increase year over year, but now expects to be closer to $4.5 billion in sales growth, noting an unusual combination of tariffs, a U.S. government shutdown, weather events, and weakness in Asia and Europe for the company's sluggish performance.
"This was a very, very tough operational winter and in some cases unprecedented," Smith said on the call.
FedEx also has an Amazon concern, with the e-commerce giant slowly shifting its shipping away from third-party vendors to its own growing fleet of airplanes, trucks, and delivery vehicles. FedEx claims Amazon represents less than 1.3% of total revenue, but the shift, if nothing else, could eat into the expected growth in home delivery.
Although recent quarters have been disappointing, FedEx in March did suggest the worst might be over. On the call, Smith said the company is seeing "a few green sprouts" heading into spring, including some signs that Europe is improving.
The shift to six-day ground service will continue to weigh on comparisons for much of calendar 2019, but once it is fully implemented FedEx should be well positioned to grow its e-commerce delivery business, including the packages of all of Amazon's rivals, and the added day will allow for a better utilization rate for its assets.
And the better buy is...
I'm a current XPO shareholder, and despite the criticism from Spruce Point and the operational issues that have dragged the stock down, I have seen no reason to believe the issues the company faces are structural, and I have no intention right now to sell my shares.
That said, XPO, even after the stock's dramatic decline still, trades at 23 times earnings, nearly double FedEx's 13.8x multiple and considerably higher than the multiples the market gives freight brokerage leader C.H. Robinson Worldwide or parcel giant UPS. The only way for XPO to justify that valuation is if Brad Jacobs' roll-up machine starts firing again, and until there is some indication that XPO intends to resume dealmaking or find some other ways to grow, I can't justify buying the shares at this level.
FedEx is a solid operator that has fallen on hard times. I believe the worst is behind it, and the company over the coming quarters should show improvement as the six-day service rolls out, and if some of the uncertainty surrounding tariffs and trade wars clears.
XPO has the higher risk/reward offering right now. But for most investors, FedEx looks like the better buy as it is the more-sure bet for new money being put to work today.
