XPO Logistics (XPO 0.73%) shares have been running hot since the early days of the pandemic, with the stock more than doubling since last April.
In this video from Motley Fool Live, recorded on Feb. 4, Industry Focus host Nick Sciple and Motley Fool contributor Lou Whiteman discuss what makes XPO special and why they still see more upside from here.
Nick Sciple: I wanted to talk about one other company that should be on folks' radar, we've talked about it offline some, it's been on the watch list for a long time. I've never bought shares, but I need to correct that sometime soon. But you do own shares in XPO Logistics, Lou, why is this a company in logistics or in shipping that people should be paying attention to?
Lou Whiteman: Another one by the way that's had a big fight with Amazon, and saw its stock suffer. But XPO is more diversified than UPS or FedEx. It is a large logistics company. It's doing like we talked about with FedEx. It wrote the road map on how to compete with Amazon. It's XPO direct product is basically the entire back-office for retailers who aren't named Amazon, who can't maybe necessarily do that scale on their own, but collectively they can get that scale and better compete. It's also a very confusing company to follow because it's one of the largest trucking businesses, it's got a huge European operation. Quite frankly, it's stock was a real dog during the pandemic, because of the European operations, it got hit twice on the pandemic. It's got a lot more debt than its peers, because it is a 10-year roll-up story, up until the last year or two, it had been constantly buying things. It's CEO, Brad Jacobs, back in April, basically had to write a pep rally letter to shareholders. He said, "Look, I'm a mega bull in this company long-term. We've built this company like a bullet proof tank, we're going to generate a lot of cash in the downturn." The stock has come back, but it is still a very interesting company to watch with a lot coming up this year.
Sciple: You mentioned two things; you mentioned the roll-up strategy and you mentioned Bradley Jacobs. If you look at his track record, Bradley Jacob and roll-up, he's like a hall of fame. His track record, this isn't the first of his companies that he's built. He tells you he's bullish on a company. If his track record is any proof, he's probably correct.
Whiteman: If you look at it, he said, "We will generate cash through this," because that was a real concern. They do have a lot of debt relative to their peers. The two quarters they've reported since then, they beat analyst expectations for cash both times, $200 million in the second quarter, almost $300 million in the third. The stock is up 112% since that letter. It's still arguably undervalued, and we can get into this, in December they announced plans to split into two companies. On one side, you are going to own the world's second largest contract logistics operations. This is the e-commerce focus thing. This is what we talked about, the Direct product and the Amazon logistics for everybody not named Amazon. On the other side of it, you have the third largest provider of less-than-truckload transport in North America, which is a very lucrative part of the business. The idea, instead of filling a truck for one customer, putting a lot of different customers orders on a truck, so it's a lot more complex. It's also one of the second-largest freight brokerages. Hopefully by the end of this year, these will be two separate companies.
The reason is really simple: XPO trades today at an enterprise value 13 times EBITDA. If you look at some of the pure plays in these two businesses, a best-in-breed, Old Dominion is a less-than-truckload best-of-breed. It trades at a 21x multiple. Logistics specialist C.H. Robinson, again, a very good company, they traded 16x. XPO again was at 13x. They are hoping for a simpler story, a less confusing, muddled story. They can get rid of the conglomerate discount. You can also reshuffle the debt and put more debt on the logistics side, which should be faster-growing and hopefully achieve investment-grade for both. I really believe for all of the gains the stock has made, it is still undervalued, it is still the most interesting thing out there. When this split happens, it's going to be really interesting to see what Jacobs does next and where it goes from here. Because when you give him a currency, when you give him freedom to go out and explore and buy things, as you say, he has a wonderful track record of creating value and I have no doubt he'll do it again.
Sciple: As you're talking Lou, it reminds me. I think it was a year or a year and a half ago, we talked about the DowDuPont split and how the management in that case had a great track record of creating value. You have a similar situation where you have this event, where you have a manager with a track record of allocating capital and creating value with the way they've moved things around. You can tell a story about why from a fundamental point of view, this business has lots of tailwinds, and you could tell a story just from a valuation point of view, if you just snap your fingers and close that valuation gap, the company can really produce gains for you. I don't know, there's a lot to like about XPO, I think, and I've watched it for far too long. I think maybe it's about time for me to buy a few shares.
Whiteman: One more thing too, if you just think of the psychology, and it is all too common for an empire builder to fall in love with his empire. I think it shows almost heartless, and I mean that in a good way, but a ruthless commitment to shareholder value, to rip what you have created in half, because the market in your mind doesn't recognize the value. Part of me is a long-term holder, I'm OK. I intend to hold it forever. I sometimes think, "Man, this is a good business. I wish they'd keep it together and figure it out." But you really have to appreciate him, the guy who built it saying, "No, it's not working. I am going to do this dramatic thing because this isn't working." Again, as far as a CEO, this is a back-the-jockey played for me and it's so far so good.