The big day is almost here. On Aug. 2, XPO Logistics (XPO 2.77%) will split into two companies. The contract logistics part of the business will be renamed GXO Logistics, while the transportation portion, which includes the less-than-truckload business, the freight brokerage, and the last-mile delivery business will remain with XPO.
The company has previously argued that the spinoff offers a number of advantages, including that it would make it easier for Wall Street to understand and value the businesses as separate entities; each one can pursue acquisitions with their own debt and equity as it best sees fit; and equity compensation will better reflect the performance of the underlying business.
As the separation nears, GXO's management shared some key points with investors at its Investor Day conference on July 13. Keep reading for three of the biggest highlights from the presentation.
Image source: XPO Logistics.
1. GXO will be the biggest pure-play logistics company in the world
With several different businesses under its umbrella, XPO CEO Brad Jacobs believed that XPO's current combined structure made the transportation stock difficult to value because the company had no true peers.
The separation takes care of that problem. As a stand-alone company, GXO will not only have a set of peers to make comparisons easy, but it will also be four to eight times as big as its closest peers.
That size gives the company a number of advantages, including in scalability, attractiveness to customers, and the ability to make acquisitions.
In an interview, Chief Investment Officer Mark Manduca offered Clipper Logistics, a U.K.-based logistics company that currently trades at price-to-EBITDA ratio of roughly 20, based on 2020 results, as a good peer to use for GXO's own valuation.
Manduca also said he thought GXO was deserving of a high-teens EBITDA multiple and argued that the company should trade at a premium based on its growth rate. GXO is targeting 8%-12% organic revenue growth in 2022, and 17% EBITDA growth in 2021 and 2022.
2. The industry has a number of tailwinds
Half of GXO's revenue comes from e-commerce, omnichannel, and technology, and e-commerce itself may represent the biggest opportunity for GXO. In the U.S., e-commerce sales have historically grown around 15% annually, according to the Census Bureau, and GXO itself estimates that only 20% of the applicable retail opportunity has so far been captured, meaning the e-commerce logistics market could grow by as much as five times. Similarly, automation and outsourcing in the industry also present significant tailwinds.
Currently, only 5% of warehouses are automated, while 30% of the industry, or $130 billion, is currently outsourced, meaning there's still a $300 billion global logistics opportunity for GXO in what's currently insourced, or what companies handle in-house. Demand for automation will steadily rise as technology improves and customers aim to keep up with their peers, and Manduca noted that the shift to outsourcing was accelerated by the pandemic as logistics has become more complex.
Reverse logistics, or processing returns, has become more in demand in recent years, adding another dimension to growth for GXO. From 2018 to 2020, revenue from reverse logistics increased 15.8% annually to $522 million. As more customers turn to GXO for reverse logistics management, that should provide a long-term tailwind.
3. Margins should expand over the long term
GXO considers automation to be one of its most important competitive advantages. Using technologies like robotic arms and destackers, the company is able to increase productivity by four to six times. For instance, its robotic arm can pick 800 cases per hour compared to manual labor, which picks 210 cases per hour.
GXO already brings in 30% of its revenue from automated solutions, compared to just 5% across the industry, showing that automation gives it an advantage against its peers. It's also seeing faster revenue growth and higher margins from automation, and automated solutions helps it persuade customers to outsource logistics as it shows them that GXO can do things that they can't. The company said it will have more than 3,100 robots and automated solutions in place by the end of the year.
Additionally, proprietary technology tools like GXO Smart, which helps maximize labor efficiency, will also help drive expanding EBITDA margins.
As a stand-alone company, GXO will have roughly 900 warehouses and 100,000 employees, and be well-positioned to grow both organically and through acquisitions.
After a year when e-commerce stocks have soared and online retail has become even more central to day-to-day life, GXO offers a new way to play the e-commerce boom. The stock could make a splash when it debuts in just a couple of weeks.
