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Why Shares of XPO Logistics Are Up Today

By Lou Whiteman – Oct 5, 2020 at 2:40PM

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The company is reportedly seeking options for its European supply chain business.

What happened

Shares of XPO Logistics (XPO 2.52%) soared 10% on Monday following a report that the transportation company has restarted efforts to sell its European supply chain business. XPO was considering a number of divestitures earlier this year, but called off the auctions due to the COVID-19 pandemic.

So what

XPO houses an impressive set of logistics and transportation assets, but the market in recent years has not been impressed. The company trades at an enterprise value roughly 9.4 times earnings before interest, taxes, depreciation, and amortization, a discount to more focused businesses like logistics specialist C.H. Robinson Worldwide and trucker J.B. Hunt Transport Services.

An XPO truck driving on a city street.

Image source: XPO Logistics.

In January the company attempted to address that so-called conglomerate discount by putting a number of large pieces of the business on the auction block, but that process was disrupted by the pandemic.

XPO is now exploring its options again. Bloomberg reported that the company is gauging interest in its European supply chain operations, hoping to fetch between $4 billion and $4.5 billion in a potential sale to a private equity firm or a strategic buyer. XPO declined comment on the report.

Now what

The deal talk should not come as a surprise. Late last month I predicted XPO would soon restart the auction process given that the valuation gap between XPO and its pure-play rivals is actually wider now than it was back in January.

As I said last month, I view XPO as a long-term winner even if no asset sales happen. The company is well positioned to take advantage of trends including the acceleration of e-commerce and the outsourcing of distribution services. The real question is how long investors will have to wait for that payoff.

Exploring options for parts of the business should be a win-win for investors. Should management receive a premium offer for the European business, validating its argument the sum of the parts is undervalued, the stock should move higher quickly. If not, I like XPO's long-term chances as a stand-alone.

Lou Whiteman owns shares of XPO Logistics. The Motley Fool recommends C.H. Robinson Worldwide and XPO Logistics. The Motley Fool has a disclosure policy.

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Stocks Mentioned

XPO Logistics Stock Quote
XPO Logistics
XPO
$38.62 (2.52%) $0.95
J.B. Hunt Transport Services Stock Quote
J.B. Hunt Transport Services
JBHT
$183.89 (2.26%) $4.06
C.H. Robinson Worldwide Stock Quote
C.H. Robinson Worldwide
CHRW
$100.22 (3.31%) $3.21

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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