Why XPO Logistics Looks Like a Recovery Winner

XPO Logistics (XPO -1.93%) hit all-time highs this past week.

The diversified transportation and logistics company already looked like a promising way to play the recovery, given the cyclical nature of the business and the recent strength in the manufacturing sector, but signs are now emerging that its growth may ramp up even faster than expected.

After the company staged a strong recovery from the COVID-19 pandemic in the second half of last year, management's guidance in February called for 24% to 29% growth in adjusted EBITDA in 2021 to $1.725 billion to $1.8 billion. Last week, the company said it was accelerating hiring in its less-than-truckload (LTL) division, recruiting for more than 1,400 positions, including drivers and dockworkers.  

Now, in his annual shareholder letter released on April 13, CEO Brad Jacobs sounded as bullish as ever on the company's future, saying: "After a painful 12 months for pretty much everyone, 2021 and 2022 are shaping up to be big comeback years for the vast majority of our customers."

Jacobs also said he thought U.S. GDP growth could reach as high as 10% this year, as most of XPO's customers think they'll be in a much stronger position a year from now. Let's take a look at other highlights from the letter, and why the company looks poised to thrive during the recovery.

Image source: XPO Logistics.

A number of tailwinds

XPO's business spans multiple segments, including less-than-truckload, freight brokerage, and last-mile e-commerce, and that diversification gives it exposure to multiple tailwinds in the recovery.

E-commerce is one significant growth driver. Jacobs called e-commerce "a broad-based tailwind, with demand coming from pure-play e-tailers, omnichannel retailers and direct-to-consumer manufacturers." The company is the largest provider of last-mile logistics for heavy goods in North America, and is a key partner of retailers like Home Depot and IKEA that have thrived during the pandemic and look poised for a strong performance in 2021.

Meanwhile, the broader growth in e-commerce, whose sales jumped by about 32% in the U.S. last year according to data from the Census Bureau, also favors XPO. The company's contract logistics division, which provides high-tech warehouses close to customers to facilitate speedy delivery and handle returns, has also seen strong demand of late.

Separately, the industrial economy, which was in a recession prior to the pandemic, is beginning to pick up strength, which is driving growth in the LTL division where most revenue comes from industrial companies. Jacobs said: "Our LTL customers tell us that demand is speeding up as manufacturers move back to full production in the upcycle."

Indeed, the ISM's manufacturing index reached 64.7 in March, its highest reading since 1983, showing a red-hot recovery in the manufacturing sector. The survey also said that demand continued to outpace supply, a bullish sign that manufacturing activity should continue to ramp higher.

Finally, outsourcing and advanced automation have also emerged as key tailwinds for the company, benefiting in part from its investments in technology. As supply chains become more complex, which we are seeing with delays at ports and congestion in other areas, companies are increasingly turning to XPO for greater flexibility and visibility into the movement of their goods. XPO is also leveraging its investments in high-tech areas like machine learning, artificial intelligence, and robotics to speed up operations and improve safety and accuracy.

A bright outlook

Given the momentum through 2021 thus far, Jacobs said he had a "high degree of confidence" that the company would meet or exceed its adjusted EBITDA target for 2021, and with the tailwinds from the recovery, 2022 could be a strong year as well. Based on its EBITDA guidance, XPO trades at an EV/EBITDA of 11, making it look reasonably priced.

The company also continues to make progress on the spin-off of its contract logistics business, to be called GXO as a stand-alone company. It's now filled out most of the management team. In separating the transportation and logistics businesses, Jacobs argued that XPO has been undervalued because it trades at a conglomerate discount. Wall Street hasn't been appreciating the full value of the business, in other words, because XPO has no true peers.

Even with the stock at all-time highs, XPO looks poised to continue outperforming the S&P 500 based on the tailwinds above. Any additional benefit from the spin-off unlocking value would only sweeten the transportation stock's prospects.