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After a Rough Quarter, XPO Logistics Looks Ahead to the Recovery

By Jeremy Bowman – May 8, 2020 at 8:14AM

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Revenue and profits declined as expected, but the future looks brighter.

No one was expecting the transportation and logistics industry  to escape the coronavirus crisis unscathed, and indeed XPO Logistics (XPO 5.17%) had already warned investors of the effects of the pandemic. CEO Brad Jacobs said in April that 2020 would be a lost year for earnings growth in logistics and in most industries. 

XPO's first-quarter earnings report shed more light on the challenges XPO is facing. Revenue in the first quarter declined 6.3% to $3.86 billion. As Jacobs said: "Our results were tracking well until mid-March, when COVID-19 reached pandemic proportions. At that point, our end markets rapidly deteriorated." 

On the bottom line, adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) declined modestly from $264 million to $253 million as technology initiatives, productivity gains, and pricing optimization helped lift adjusted EBITDA in its logistics segment. Adjusted earnings per share slipped from $0.51 to $0.47.

On the earnings call, management also warned that revenue had fallen in April in the low-to-mid 20% range, though the European business was recovering from its bottom. In the U.S., on the other hand, business had stabilized at a bottom point but had yet to start bouncing back.

Despite the expected decline in revenue and profits and the weak results, XPO shares jumped on the report as management remained optimistic about the recovery and pointed to particular strengths that should give XPO a boost as the economy improves. Let's take a look at a few of those factors.

An XPO Logistics truck on the highway

Image source: XPO Logistics.

Strong financial footing

After an $850 million debt raise in April and a new credit facility, XPO currently has $2.5 billion in liquidity. Though the company still expects to generate hundreds of millions of dollars in free cash flow even in a worst-case scenario, the additional financing gives the company flexibility in case of a second wave of infections or a "W-shaped" recession, as Jacobs said on the call. It also puts the company in a position to make an acquisition down the road if an opportunity comes up, as management alluded to on the call, and enables it to repurchase stock opportunistically, though it has suspended its share buyback program for the time being.

Management also believes it will emerge from the crisis with a better cost structure, as the pandemic has forced the company to become more efficient and cut costs. Jacobs acknowledged that some changes, like a pullback in travel and entertainment, and working from home where appropriate, might persist after the pandemic.

A focus on automation

Jacobs called his company a leader in warehouse automation, as it has invested hundreds of millions of dollars a year in areas like machine learning and warehouse robotics that can automate picking and packing. With the need for social distancing during the pandemic, automation technology for the warehouse is likely to be in higher demand. The company is opening its "digital warehouse of the future" with Nestle in the coming months in the U.K. as a test site for XPO automation technology prototypes.  The new facility, which will be owned by XPO but occupied mostly by Nestle, will feature advance sorting systems, robotics, and state-of-the-art automation. XPO also said the facility will use integrative predictive data and intelligent machines to speed up distribution and delivery of Nestle products. 

Automation isn't just strength in and of itself. It helps the company save money, accelerate turnaround times, and win new business, and that technology should only grow more attractive in the COVID era. 

A tailwind in e-commerce

E-commerce is just one component of XPO's business, and its last mile segment, which specializes in the delivery of heavy goods like furniture and appliances, is smaller than freight brokerage and less-than-truckload. However, that business is thriving during the pandemic, as the mass store closures and stay-at-home orders have led to a spike in online shopping. Organic sales in core last mile heavy goods were up 9% in the first quarter as consumers ordered things like exercise equipment, appliances, and home improvement items while sheltering in place.  Jacobs expected the growth in e-commerce to persist even after the crisis fades, calling it a secular shift rather than a cyclical one, meaning the company should continue to see steady growth in last mile and e-commerce as consumers get accustomed to shopping for large items online.

Though XPO still sees 2020 to be a lost year for earnings growth and had warned earlier in the year that the second half of the year may be worse than the first quarter, Jacobs was bullish on 2021, and expects XPO to be in a strong position when the industrial economy recovers.

XPO should benefit from natural tailwinds in e-commerce and automation, and if it can succeed in trimming its costs, its performance should improve significantly when the economy returns to full health. Though the macroeconomic recovery may not be for a couple of years, XPO still looks like a solid long-term bet.

 

Jeremy Bowman owns shares of XPO Logistics. The Motley Fool recommends Nestle and XPO Logistics. The Motley Fool has a disclosure policy.

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Stocks Mentioned

XPO Logistics, Inc. Stock Quote
XPO Logistics, Inc.
XPO
$45.98 (5.17%) $2.26
Nestle S.A. Stock Quote
Nestle S.A.
NSRGY
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