Shares of XPO Logistics (NYSE:XPO) gained nearly 10% on Friday after the shipping and logistics company said it was a terminating its strategic review that could have seen it sell off multiple business units. It's hard to know if the market is really celebrating the decision, but investors are certainly applauding some clarity in a time of great uncertainty.
In January, XPO said it was exploring the sale of significant chunks of its business, complaining that the market was assigning a so-called "conglomerate discount" to its operations and arguing that each of the businesses would be valued higher if out on their own.
Shares of XPO have lost about half their value since that announcement. Unfortunately, valuations across the transport and shipping sectors have come down as well as the COVID-19 coronavirus pandemic has slowed economic activity and cut shipping volumes.
Investors in recent weeks have been growing increasingly worried that the economic ramifications will last well beyond the pandemic. They are focused on XPO because of the company's relatively high $7.54 billion in total debt as they look for reasons to buy or sell stocks heading into a potential recession.
With so much uncertainty, it was unclear whether XPO would find buyers willing to pay attractive pricing for its assets. In calling off the auctions, the company can reassess as markets improve (or don't) in the months to come, and focus on getting through the near-term crisis.
XPO still is faced with the challenge of managing its debt load through a potential extended economic slowdown.
As a shareholder, I have mixed feelings. I bought into the company believing it had the potential to create real long-term value because of the strength of its diverse set of assets, and I was initially disappointed to hear of the sale plans. Then again, CEO Brad Jacobs has a multidecade history of delivering for shareholders, and if he thinks a breakup is the best path forward, it is hard for me to argue.
With the sale process off, XPO can now muddle through a potential recession along with the rest of the transports. It won't be pretty, but even if there is an extended slowdown, the company should have no trouble generating the cash needed to manage its debt. And when the economy does eventually turn positive, XPO is among the transports best positioned to capitalize on trends like the growth of e-commerce.