Why Shares of XPO Logistics Gained Ground Today

What happened

Shares of XPO Logistics (XPO 4.08%) traded up more than 12% on Tuesday afternoon, and were up by more than 20% earlier in the day, on improving market sentiment concerning the COVID-19 pandemic. Broader markets were higher on Tuesday on headlines that could suggest new virus cases in hotbeds like New York City were decreasing, providing hope that the pandemic might soon be brought under control.

So what

Shipping stocks have been pounded by the pandemic, which has decreased global economic activity, and in doing so has brought down shipping volumes.

XPO is seen as particularly vulnerable to a recession because the company carries more than $7 billion in debt on its balance sheet. Earlier this year, it tried to use divestitures to raise cash and pay down some of its debt, but called off that process in March due to volatile market conditions.

Image source: XPO Logistics.

The company has historically been an active acquirer, and more recently has been plowing capital into development of high-tech tools designed to better automate customer supply chains and make XPO's logistics offerings more compelling. Those initiatives have been well received and were growing rapidly, but could come under pressure in the event of a recession.

XPO shares had lost nearly half their value year to date as of a few weeks ago, but have been coming back in recent trading sessions following the passage of the $2 trillion economic stimulus plan and improving projections about how long the pandemic will last and what the long-term impact on the economy will be.

XPO did issue an update on Monday, saying it is "using a combination of rigorous protective measures, technology and virtual communications" to keep employees safe while allowing "nearly all" of its sites to continue to operate. The company is also working with New York City emergency management personnel to help coordinate distribution of much-needed supplies.

Now what

There's no way to sugarcoat it: The global shipping and logistics industry ebbs and flows with the health of the broader economy, and the pandemic's impact on industrial production and economic activity is sure to take a toll on XPO and other shippers. The unknown is how bad the hit will be, and how long it will last.

XPO vs. CH Robinson data by YCharts.

XPO today trades at a substantial discount to logistics rival C.H. Robinson Worldwide in terms of its multiple to sales and multiple to expected earnings. That's understandable given its higher debt load and the potential for a recession, but I believe it is also overdone. XPO is in for a couple of rough quarters, but even after Tuesday's jump, there is a compelling risk/reward offering in the shares.

There are likely to be more down days in the weeks to come as the pandemic story continues to play out, but for those who can handle the rocky road, XPO shares still look intriguing at these levels.