After a series of setbacks in 2018 that brought the bull run in XPO Logistics ( XPO -1.25% ) shares to a grinding halt, management has strived to exploit opportunities in e-commerce and make up for the loss of a major customer. The stock has doubled since then, but investors have still wondered if XPO will ever be the exponential growth stock it once was.
Well, it might, if management's latest plans to unlock greater value for shareholders are anything to go by. For all you know, 2021 could be the beginning of a transformational journey for XPO Logistics.
The big event to watch out for
XPO Logistics has two reporting segments: logistics and transportation, which accounted for roughly 36% and 64%, respectively, of its revenue in 2019. Its logistics segment is the second-largest provider of contract logistics in the world, while transportation is a leading freight company and the third-largest less-than-truckload provider in North America in terms of sales, right behind FedEx and Old Dominion Freight.
For more than a year now, management has considered splitting the company to maximize shareholder value, as it believes XPO is undervalued and trades below the sum of its parts. The idea could finally come to fruition, as management recently announced a plan to split the two business segments into separate publicly traded companies.
XPO believes the breakup will create two pure-play businesses that could "unlock significant equity value not currently reflected in the existing conglomerate and thereby benefit both businesses and their stakeholders." There's some merit to that argument.
Ideally, as separate companies, each should be able to focus on respective offerings of logistics and trucking, leverage their resources to expand key products and services, and tap capital markets more effectively. That should boost their earnings potential and eventually, shareholder returns. It helps that CEO Brad Jacobs is planning to serve as the CEO of the new trucking company and chairman of both companies.
The split, however, is expected to be completed later in 2021, so this could be an exciting year for XPO investors as they watch for any developments on the front. Meanwhile, XPO looks poised to make the most of improving business conditions and the e-commerce boom.
2021 themes: E-commerce, technology, and vaccines
2020 was a challenging year for transportation companies, as economies shut down in the wake of the COVID-19 pandemic. XPO navigated the storm well, even reporting 1.7% year-over-year growth in third-quarter revenue. When compared with its 17% drop in second-quarter revenue, it signals a rebound in XPO's end-market conditions. In the nine months ended Sept. 30, 2020, XPO's revenue declined only around 7% to $11.6 billion, with last-mile revenue improving 1 percentage point.
Last mile is one of XPO's biggest competitive advantages. The COVID-19 pandemic has been a massive catalyst, as demand for online shopping surged -- and with it the need to home deliver heavy goods. XPO's last-mile revenue grew 11% year over year in Q3. Last-mile carriers should also play an important role in the distribution of COVID-19 vaccines. XPO, the largest last-mile provider in North America, has already started distributing vaccines.
XPO's heavy investments into technology in recent years are also paying off. For example, active users on XPO Connect, an automated digital marketplace that connects shippers and carriers to XPO's transportation network, jumped 94% through the nine months ended Sept. 30, 2020. Drive XPO App had 60,000 downloads in just the third quarter. Likewise, XPO's nationwide shared-space distribution program for retailers and e-retailers, XPO Direct, was profitable through 2020.
I expect 2021 to be a solid year for both Connect and Drive, backed by e-commerce growth. XPO will also likely deliver strong numbers for the fourth quarter, given a solid 2020 holiday season, and that should reflect in its share price.
A compelling stock to buy
XPO is a well-run company that's entered 2021 with strong liquidity and robust free cash flow. Even if one argues that 2020 was an exceptional year for e-commerce and an encore in 2021 is unlikely, there's no denying that e-commerce is a secular trend, and XPO is well-poised to take advantage of it. Regardless of whether XPO splits or not, it's the kind of stock you'll want to own in your portfolio.