It's been a rough month for markets, and transport companies have been hit particularly hard as investors react to the rapid spread of the COVID-19 coronavirus pandemic. The year had already started slow for shipping volumes even before the outbreak began to shut down manufacturing and clog supply chains, and the outlook for 2020 is declining daily as the prospects of an economic slowdown increase.
XPO Logistics (NYSE:XPO) and J.B. Hunt Transportation (NASDAQ:JBHT) have both been caught up in the downward pressure. Transport stocks tend to be cyclical, tied to the health of the global and U.S. economies, and investors are increasingly nervous that we could be headed for an extended downturn.
The stocks are down, but in light of current events, is either of the companies on sale? Here's a look at XPO and J.B. Hunt to try to determine which, if either, is a better buy today.
XPO Logistics changes course again
XPO Logistics shareholders have been on a wild ride over the last two years. The company was a longtime high flier, with its shares appreciating by nearly 3,000% during a 10-year period ending in mid-2018, but the stock gave up about half of those gains in the last 18 months due to criticism from a short-seller and the unexpected loss of a major customer.
After a difficult early 2019, the company spent the rest of last year demonstrating that the worst was behind it, but caught investors off guard in January 2020 when it announced it was exploring selling one or more of its business units. XPO management said at the time that they believed the stock was suffering from a so-called conglomerate discount, meaning that investors are not properly valuing the different parts of its portfolio.
Management couldn't have picked a worse time to seek sales. A cratering market, coupled with XPO's $7.54 billion in total debt, sent investors fleeing for the exits with XPO shares losing more than half their value in the last month alone. XPO called off the sale process on March 20 due to volatile market conditions.
The auctions are over, but XPO management still has a lot on their plate. They are heading into a possible recession with a lot of debt. And the sale process had to have been at least somewhat of a distraction for company leaders in recent months.
XPO also has an impressive business that managed to outperform through 2019 even as other shippers stumbled due to trade wars and economic fears.
The company says that big bets made on tech are beginning to pay off. XPO has been investing $500 million annually in products, including XPO Connect, a cloud-based digital freight marketplace for shippers, and XPO Direct, which aims to help retailers compete with Amazon.com by providing a suite of logistics products. XPO Connect passed the 100,000-driver download threshold in December. And XPO Direct is on pace to be a $1 billion-sales business by 2022.
Whether that sort of growth can be sustained should the U.S. fall into a recession remains to be seen, but XPO appears to have ample cash flow to service its debt. The company could actually see an uptick in its European business due to the pandemic, as it is a major logistics provider for e-commerce food, beverage, and dry goods there.
J.B. Hunt could get stuck in neutral
J.B. Hunt is best known for its intermodal business, cargo containers that travel to their destinations via multiple forms of transit including ship to truck or truck to train. Intermodal makes up more than half of total sales, with the company establishing itself as a major force in the lucrative business of bringing cargo east from the large California ports. In recent years J.B. Hunt has been trying to diversify its business by bulking up its truckload and less-than-truckload services units, and moving into last-mile delivery.
Last year, the company bought Cory 1st Choice Home Delivery to expand its presence in the $5 billion market for delivery of furniture and other bulky items to homes and offices. In January it added RDI Last Mile Co., a $35 million-sales provider of home delivery services for big and bulky products.
The goal is to jump-start earnings and move into the fast lane. J.B. Hunt has been a sluggish performer even before the recent downturn, underperforming the S&P 500 by 18 percentage points during a five-year period ending last December.
But transformations take time, and J.B. Hunt's core business has been under pressure. In January it missed quarterly earnings expectations on lower-than-expected intermodal margins, and it has higher expenses as it invests in hirings and tech for its brokerage business.
The pandemic is likely to weigh on J.B. Hunt's results in the first half of 2020, and possibly beyond. Port of Los Angeles vessel calls are expected to fall more than 30% in March, and that is coming off a February 23% decline.
Even if China is slowly recovering, with quarantines and social distancing just starting to heat up in the United States, it is hard to see volumes recovering any time soon. Berkshire Hathaway-owned BNSF Railway said in mid-March that the number of trains leaving the ports of Los Angeles and Long Beach toward Chicago has dropped from about 50 per week to 25, and intermodal volumes are falling as well.
And the better buy is...
It is tough to get excited about transport and logistics businesses when standing at the precipice of a potential recession. If the pandemic does, as feared, have a long-term effect on the economy, industrial activity and shipping volumes will come down. And as they do, so too will near-term earnings for the transport sector.
XPO Logistics and J.B. Hunt are both businesses in transition at a delicate time for the transport industry. XPO is certainly the more affordable stock. Management complained about a conglomerate discount in the past. Today XPO trades at an enterprise value just 5.5 times EBITDA (earnings before interest, taxes, depreciation, and amortization), compared to J.B. Hunt's 7.96 times multiple and logistics specialist C.H. Robinson Worldwide's 10.5 times multiple.
Given the near-term economic outlook, it is hard to pound the table for either of these stocks at this moment, but I believe both companies are strong enough to ride out whatever difficult times are ahead of us. And for those who are able to stomach a bit of rough road ahead, XPO, though riskier, has a significantly more compelling long-term growth story to tell thanks to the potential of offerings like Connect and Direct.
J.B. Hunt is likely the safer stock to own over the next few months. But if you have a long time horizon, buckle up, buy into XPO Logistics, and try to enjoy the ride.