XPO Logistics (NYSE:XPO) has taken investors on a wild ride in recent years. The company's shares were up more than 2,000% for the decade heading into the fall of 2018, only to give back about half those gains in the months that followed.
In late 2018 and early 2019, the company was hit by a combination of factors, including the unexpected loss of a major customer and criticism from a short-seller. XPO appeared to be back on the right track heading into this year, only to be derailed by the COVID-19 pandemic and its impact on global shipping.
XPO shares lost more than half of their value from late February to early March. The stock has since recovered much of what it lost, but remains down for the year. Here's what the road ahead looks like for XPO.
A diversified transport portfolio
XPO is a $16 billion sales-diversified transportation and logistics company. It's a freight brokerage, a large less-than-truckload shipping service, one of the world's largest contract logistics providers, and North America's top provider of home delivery for bulky goods.
The company has tried to differentiate itself via tech, investing $500 million annually in building out a suite of products in hopes of becoming a preferred vendor for customers. Its XPO Connect, for example, is a cloud-based digital freight marketplace connecting shippers and carriers that offers streamlined bidding for services, as well as up-to-the-minute tracking.
XPO Direct, meanwhile, is designed to help brick-and-mortar and online retailers better compete against Amazon.com by providing a full suite of logistics products. While few retailers can match Amazon's scale with their own in-house shipping and logistics platform, XPO is attempting to even the playing field.
The near-term outlook is clouded by the pandemic and the threat of a recession, but longer-term trends work in XPO's favor. The company believes the pandemic will only increase a long-running shift toward outsourcing as a way for its customers to eliminate some of the execution risk in their supply chains. Whether the rate of acceleration of e-commerce during the pandemic is sustainable or not, shopping online and shipping are almost certain to continue to grow.
The debt is manageable...
One of the big knocks on XPO throughout the crisis has been its total debt. XPO critics like to highlight the $8.17 billion total debt headline number listed on most data services to argue that the company could get in trouble during a downturn. XPO by comparison reported $1.57 billion in EBITDA over the past 12 months.
More than $2.1 billion of the debt total is operating leases. In XPO's case, that covers real estate, including contract logistics warehouses, terminals, hubs, and transport facilities. There is a good bit of debate on Wall Street about whether operating leases should be counted in debt ratios. They're financial obligations, but they're also assets that help the business generate a return.
Strip away operating leases, and XPO's debt looks more manageable: $5.76 billion in long-term debt and $260 million in short-term borrowings as of the end of the first quarter.
No matter how the debt is calculated, the concerns appear overblown. XPO has no significant debt maturities before June 2022, providing time to ride out the storm.
Despite the downturn, the company still expects to be free cash flow positive in 2020, in part because a lot of its capital expenditures for the year were designed to support growth and can be scaled back if demand remains sluggish.
...but it's hard to know what comes next
Another criticism of XPO is the lack of clarity about the company's future. For most of its history, XPO had been an aggressive acquirer, but management shifted gears early in 2020 after concluding the shares were undervalued and instead looked to sell major pieces of the business.
The pandemic halted those plans. It's hard to say today whether XPO would revisit them in a post-pandemic environment. The length of the recovery, and exactly how the market values XPO whenever the recovery arrives, will factor in. We also don't know what other opportunities management might find in the future that were not available when the divestitures were announced.
Management's commitment to shareholder value -- be it via acquisitions or by divestitures -- has been a theme. CEO Brad Jacobs has a reputation as a dealmaker, but as the breakup plan shows, he is not just determined to build an empire.
As a holder of XPO stock, I have no idea whether XPO will look to expand, divest, or simply use free cash flow to pay down debt over time. But I have come to believe management will make those decisions unapologetically based on what is best for shareholders.
XPO is a buy
Based on XPO's diverse revenue streams and investments in technology, I'd argue it deserves a premium to other transports. Yet the discount remains.
There is no perfect one-for-one comparison to XPO, but we can compare it to companies that operate in some of the same businesses. XPO today trades at an enterprise value eight times EBITDA. By comparison, trucking specialist Old Dominion Freight Lines trades at an enterprise value 17 times EBITDA, and C.H. Robinson Worldwide, a top brokerage company, trades at almost 15 times EBITDA.
I can't say for sure whether that gap will close on its own, whether the divestiture talk will eventually resurface, or whether Jacobs and XPO will see other avenues ahead to improve shareholder value. But I believe over time management will find a way to boost the valuation. It is a great time to buy into XPO and go along for the ride.