Shares of XPO Logistics (NYSE:XPO) fell 9% on Thursday, a down day for the overall markets. Investors are beginning to get worried that the U.S. could soon face a second wave of the COVID-19 pandemic, which would likely cause the economic reawakening we've been enjoying to lose steam and potentially throw the U.S. economy into an extended recession.
XPO and other transport companies are tied closely to the business cycle, because typically more goods are shipped in good times than bad. XPO shares were hit hard during the initial wave of the pandemic, though the stock made much of that ground back as the year went on. After Thursday's close, it's off 6.35% for the year.
Stocks were under pressure on Thursday due to reports that new COVID-19 cases are surging higher in key U.S. markets like Texas, Florida, and California. The fear is that the second wave of the pandemic is at hand. If it's as bad as the first wave, states could once again put in place stay-at-home orders and slow economic activity, which would likely bring down shipping volumes.
XPO's CEO Brad Jacobs, who said in April that 2020 is likely to be "a lost year" for earnings growth, told an investor conference on June 8 that he fully expects a second wave to come. XPO has withheld full-year guidance in part because it's impossible to say how bad that second wave will be; Jacobs said "we need to be realistic about the fact that there's ambiguity in how the rest of the year will play out."
Jacobs is likely to end up being correct that it will be a tough year for earnings growth, but XPO is well-positioned to survive it. Investors fled XPO shares early in the downturn, in part because of the company's large $8 billion debt load, but the company has no significant debt maturities before June 2022.
The company also has a lot of flexibility when it comes to free cash flow, as many of its planned capital expenditures for the year were designed to support growth initiatives, which will be unnecessary if demand does slow. And more than three-quarters of XPO's cost structure is variable, meaning it can be adjusted downward if revenue comes under pressure.
XPO shares today are inexpensive, with the logistics and trucking hybrid trading at an enterprise value of just 8.11 times EBITDA (earnings before interest, taxes, depreciation, and amortization), well below the 12.2 multiple the market assigns to logistics specialist C.H. Robinson Worldwide, or the 15.7 for trucker Old Dominion Freight Line.
I believe XPO, thanks in part to its more global reach and its aggressive investments in technology, can outperform its rivals over time. The near term is uncertain, but for those with a long time horizon, XPO is one of the more intriguing transportation stocks right now.