Why Shares of XPO Logistics Are Higher Today

What happened

Shares of XPO Logistics (XPO 1.92%) gained 9.5% on Tuesday morning as investors took an optimistic view on the economy reopening and progress toward a COVID-19 vaccine. The shares gave back some of those gains as the day went on, but XPO in afternoon trading was handily beating the market.

So what

Transport stocks have been hit hard by the pandemic, which has slowed global economies, cut supply chains, and led to weak demand for shipping services. XPO shares have been hit particularly hard due to the company's $8 billion in total debt, with the shares losing 58% of their value from Feb. 22 to March 21.

Image source: XPO Logistics.

Markets rallied on Tuesday after investors saw signs of economic normalization over the Memorial Day weekend in the U.S. Investors are also encouraged by good news regarding the development of COVID-19 treatments and vaccines from Merck and Novavax.

If the worst of the pandemic really is behind us, XPO shares could be undervalued. XPO CEO Brad Jacobs, during a virtual investor conference last week, argued that the company is well-positioned to rebound sharply once the pandemic is in the rearview mirror. The company has been investing heavily in automating warehouses and adding to e-commerce exposure, areas that are expected to be of particular interest in the quarters to come.

The comments echoed what Jacobs wrote earlier this year in the company's annual letter to shareholders in which he said 2020 would be difficult but predicted conditions would "get much, much better" in time for "XPO, our industry and the world."

Now what

XPO shares have recovered much of what they lost in March but are still down 14% since Feb 15.

The shares still look cheap to me. XPO trades at an enterprise value -- market capitalization plus debt -- of 7.6 times earnings before interest, taxes, depreciation, and amortization (EBITDA), well shy of the multiples assigned to logistics rivals C.H. Robinson Worldwide and Echo Global Logistics, and trucking standout JB Hunt Transport Services.

EV to EBITDA data by YCharts

XPO thanks to its debt load arguably carries more risk than many transports but in my mind also offers more upside, thanks to its oversized exposure to e-commerce, investment in technology, and relatively small international freight-forwarding business. I think the debt is manageable and have high hopes we'll see more days of outsized gains from the stock in the weeks to come.