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XPO Builds Momentum Heading Into Spin-Off

By Jeremy Bowman - Feb 16, 2021 at 7:30AM

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After a slump earlier in the pandemic, the diversified logistics company is back on track.

If there was any question that XPO Logistics' (XPO 2.12%) planned spin-off was coming out of weakness rather than strength, the company's fourth-quarter earnings report put those doubts to rest.

The transportation and logistics company posted 13% year-over-year revenue growth to $4.67 billion in the quarter, well ahead of the analyst consensus of $4.25 billion. Both its transportation segment, which is focused around its less-than-truckload (LTL) and truck brokerage businesses, and its logistics segment, which is based on a global network of hundreds of warehouses, delivered double-digit-percentage growth rates.

Truck brokerage was a particular bright spot for the company as revenue jumped 75.5% in the segment to $616 million, benefiting from the surge in e-commerce during the pandemic and the success of XPO Connect, a digital platform that allows shippers to easily find carriers through a mobile app. That app, Drive XPO, has now reached more than 300,000 downloads, adding 100,000 in just three months, and the platform now has more than 75,000 individual carriers, according to the company.

An XPO Logistics truck on the highway

Image source: XPO Logistics.

On the bottom line, adjusted EBITDA increased from $432 million to $449 million, and adjusted earnings per share rose from $1.12 to $1.19, crushing analyst estimates of $0.67. 

CEO Brad Jacobs said, "Our fourth-quarter revenue, earnings, and free cash flow were all much better than expected," and commented on the year ahead, adding, "The industry's biggest tailwinds are at our back in 2021 -- e-commerce fulfillment and returns, supply chain outsourcing and fast-growing customer demand for our digital capabilities."

Indeed, the company will enjoy the benefits of lapping the pandemic-challenged performance in 2020 as it's calling for 24% to 29% growth in adjusted EBITDA of $1.725 billion to $1.8 billion, or 6% growth over 2019's results at the midpoint. It also expects adjusted EPS of $5.15 to $5.80, up from $2.01 in 2020 and $4.03 in 2019, showing the business gaining leverage.

Here comes the spin-off

While there was a lot to like in XPO's fourth-quarter report, investor attention remains focused on the company's upcoming split between the transportation business, temporarily dubbed RemainCo, and the logistics segment, currently being called NewCo. XPO continues to target the second half of the year for the separation. While there was no material news on the spin-off in the earnings report, the company recently announced the senior leadership of NewCo, headed by Malcolm Wilson, the current CEO of XPO Europe.

As an independent company, NewCo will be the second-biggest contract logistics company in the world, behind DHL. XPO CEO Brad Jacobs has made the argument multiple times that XPO is undervalued compared to its other LTL companies, and believes the business is too complex to be properly valued by Wall Street analysts. The market has responded positively to the spin-off news with XPO trading near all-time highs, showing that investors seem to agree with the move. 

In an interview, Wilson explained the benefits of the logistics segment operating as its own company, saying the business will be comped against the proper peers, and that NewCo will be better able to spotlight its differentiation, including its technology investments in areas like automation, order fulfillment, virtual reality, and artificial intelligence to predict product returns, for example.  

Wilson also sees an advantage to the split being that the company will be able to align equity compensation directly with the performance of the business and that it can more easily pursue acquisitions that fit in with logistics. Wilson noted that on a global scale, the industry is fragmented, which would seem to create an opportunity for the would-be second-largest contract logistics company in the world.

What's next

With the logistics stock near all-time highs, XPO is trading at less than 7 times adjusted EBITDA for 2021, a significant discount to its peers. Even on an enterprise value basis factoring debt and cash on hand, it's valued less than 10 times 2021 EBITDA.

The valuation argument is there for the spin-off, but there's still a lot to be determined before the separation is complete. What is clear is that the business is accelerating heading into the separation, benefiting from tailwinds in e-commerce and from an investment like XPO Connect, which are paying off. A reopening later this year should also give a boost to the business, especially in Europe where the recovery has been slower.

While it's up to the company to execute on the planned spin-off, based on the valuation and the broader tailwinds, there's a lot for investors to look forward to in 2021.

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