For years, XPO Logistics (NYSE:XPO) operated with a predictable growth strategy.
Under the leadership of CEO Brad Jacobs, XPO grew through a "roll-up" strategy, acquiring businesses across the logistics spectrum, including areas like trucking and freight brokerage.
That strategy was key in making XPO one of the best performers on the stock market last decade, as the stock climbed 1,460% during that time. However, more recently, the company has run into challenges and began backing away from its long-held acquisition strategy. After the stock fell off a cliff in late 2018, with shares losing more than half of their value when the company slashed its outlook and got attacked by a short-seller, Jacobs announced that XPO would focus on buying back its stock, which it believed to be undervalued, instead of making new acquisitions.
Though the stock rebounded from its nadir, growth has been slow through 2019 due to softness in the market and the loss of some business from a customer believed to be Amazon. Through the first three quarters of 2019, revenue fell 3%, and management expects that rate to continue in the fourth quarter.
Against that backdrop, Jacobs surprised the market in January by saying that XPO would seek a break-up, aiming to sell all of its units except its North American Less-Than-Truckload (LTL) business, the company's fastest-growing and most profitable segment.
In the press release announcing the decision, Jacobs said that in spite of the stock's historical gains, "We continue to trade at well below the sum of our parts and at a significant discount to our pure-play peers. That's why we believe the best way to continue to maximize shareholder value is to explore our options, while remaining intensely committed to the satisfaction of our customers and employees." The company noted that no outcome could be guaranteed, and that there's no timetable for sales. The announcement sent the stock up double digits, showing investors believe the move could unlock value in XPO stock.
XPO does trade at a discount to pure-play LTL stocks like Old Dominion Freight Lines and Saia, underpinning Jacobs' logic for the move. Considering the potential sale, the logistics operator could be a much different company in one year. Let's take a look at what XPO would be like as a pure-play LTL.
A new XPO
Jacobs told The Wall Street Journal in an interview earlier about the move, "I would still be CEO, but I would be CEO of a fast-growing, pure-play LTL company with a lot of liquidity." The LTL business indeed appears to be growing quickly as the company is targeting $1 billion in Adjusted EBITDA from the division by 2021. By comparison, the company as a whole today expects 2019 Adjusted EBITDA of about $1.7 billion.
For the first nine months, LTL operating income is up 26% to $451 million, making up the vast majority of the company's total operating income of $619 million. It's difficult to say how much XPO could get in the sale of its other businesses, which include its Logistics segment and other transportation businesses like Last Mile, Freight Brokerage, and Managed Transportation. However, the company is currently valued at $8.3 billion, meaning it would bring in between $4.2 billion and $5.5 billion if the businesses it sold equaled between one half and two thirds of the current value of the company.
XPO has $5.2 billion in debt on its balance sheet now, so it could use any proceeds from a sale to pay down that debt, invest in LTL or even make acquisitions in that segment, or buy back shares as it did aggressively after the stock plunged in 2018. Based on the initial reaction from the market, investors are likely to cheer any moves it makes toward a pure-play LTL company.
If XPO's plan to slim down fails, it could weigh on the stock price, as the premium that the stock earned from the break-up announcement would likely disappear.
However, XPO continues to invest in technology, focusing on areas like data science, artificial intelligence, and automation, which have helped optimize the business and lower costs. It also recently said that its XPO Drive app exceeded 100,000 downloads from drivers last year. The app helps drivers interface easily with XPO Connect, allowing them to track available work and easily put in bids and get jobs.
Despite its recent challenges, XPO has a solid track record of organic growth. Since it made its last acquisition in 2015, revenue and EBITDA have increased by about $2 billion and $500 million since then, respectively. The company was also clear that it is only interested in transactions that would add value beyond what it would accomplish on its own.
Investors should expect to hear more details about XPO's potential break-up plan, as well as what might happen if the company stays whole when it reports fourth-quarter earnings on Feb. 11.