After a successful business separation last year, XPO Logistics (XPO +1.05%) is looking to the same playbook again. The company announced in March it was planning to separate the truck brokerage business from its core LTL operations, and new details emerged on the plans in its latest earnings report.
Management said it is confident that such a move can unlock value for shareholders once again, as the company still believes that the business is undervalued by the market due to its complexity and high leverage ratio. CEO Brad Jacobs made a similar observation ahead of the GXO spin-off of GXO Logistics (GXO 0.79%) in August 2021, which has been a clear success. At the time of the spin-off, XPO's market cap was roughly $10 billion. Today, XPO's and GXO's market caps, when combined, total $11.5 billion (a gain of 15%) while the S&P 500 is down 6% since then.
Image source: XPO Logistics.
In preparation for the truck brokerage spin-off, XPO is streamlining its business. It sold off its intermodal segment, which helped reduce its leverage ratio, and the company also plans to divest its European business, leaving both XPO and the truck brokerage spin-off exposed to just North America. It also named Drew Wilkerson as CEO, the current president of XPO's North American Transportation.
NYSE: XPO
Key Data Points
Why the spin-off makes sense
Jacobs has long argued that XPO has been undervalued by the market due to a "conglomerate discount," trading at a lower valuation than its peers.
The GXO spin-off helped simplify the company, as does the intermodal sale, but truck brokerage and LTL aren't necessarily complementary businesses. One functions as an asset-light digital freight marketplace connecting shippers with truckers, while the other is a shipping network for small loads. The two also have different customer sets and different growth rates, as the company's first-quarter earnings report highlights.
The truck brokerage business is currently on fire, with revenue up 38% to $824 million in the first quarter. XPO also saw total downloads of its digital truck brokerage app, XPO Connect, jump 78% to more than 700,000, showing the company gaining scale in a massive, highly fragmented industry.
The company currently has just a 3% market share in truck brokerage, giving it a long runway for growth, especially in an industry that is still transitioning to a digital-first world. Adjusted EBITDA also increased 21% to $134 million in truck brokerage.
Less-than-truckload is facing more challenges -- operating margin declined as the company has struggled with a driver shortage and wage inflation. It's ramped up its in-house driver school to meet the demand for drivers, and the company is making progress at rebalancing its capacity and demand, adding new terminals in a number of regions, with plans to open 900 new doors by the end of the year. Growth in LTL was solid, with revenue up 16% to $1.13 billion, and EBITDA increasing 6% to $460 million.
NYSE: GXO
Key Data Points
The spin-off should help spotlight the truck brokerage business, the smaller of the two, while at the same time giving the LTL business direct pure-play peers like Old Dominion Freight Line and Saia that will market it easier for the market to value it appropriately. As Jacobs sees it, a stand-alone LTL business should earn a higher multiple than XPO currently does.
What 2022 holds for XPO Logistics
While fears of a recession have wracked cyclical stocks like XPO, the company beat estimates in its first-quarter earnings report, and also raised its guidance, evidence that it sees few headwinds at the moment from rising interest rates or the market volatility that has weighed on some sectors.
XPO hiked its full-year EPS guidance from $5.00-$5.45 to $5.20-$5.60, meaning that the stock trades at a P/E ratio of less than 10 based on those expectations. If the truck brokerage spin-off delivers similar results to GXO, now looks like a great time to buy XPO stock.
