XPO Logistics (NYSE:XPO) has suffered through a bit of a midlife crisis in recent years. The one-time high flier has sputtered, weighed down by some company-specific issues and macro concerns, including the pandemic.
In its fourth-quarter report, the company made a strong case that better days are ahead, showing momentum heading into a pivotal year in its history.
Assuming XPO can meet the guidance targets it has set for itself in 2021, the long-running valuation gap between XPO and its transportation peers is getting harder and harder to justify. And before year’s end, XPO hopes to put the finishing touches on a reorganization plan that will help eliminate that gap once and for all.
Here’s a look at XPO’s latest report, and what to expect from the company in 2021.
A beat and a raise
XPO’s fourth quarter was arguably among the best in its 10-year history. The company earned $1.19 per share, well ahead of analyst expectations for $0.67 in earnings. Revenue came in at $4.7 billion, the highest quarterly total XPO has ever produced and 13% above the same three months of 2019.
All of the company’s various businesses delivered. Organic revenue was up 84% year over year in truck brokerage, 9% in logistics, and 4% in less-than-truckload (LTL) shipping. LTL, which is an industry term for trucks loaded with goods from multiple customers headed to multiple destinations, saw its operating ratio improve by 130 basis points year over year to 84.5%, excluding real estate.
Truck brokerage net revenue more than doubled, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) nearly tripled.
“We’re seeing strong momentum in our three largest lines of business: truck brokerage, LTL, and logistics,” XPO CEO Brad Jacobs said during a post-earnings call.
The company ended the year with about $3.1 billion in total liquidity, including $2.1 billion in cash.
XPO said it expects to earn between $5.10 and $5.85 per share in 2021, with adjusted EBITDA growth of between 24% and 29%. The per-share earnings estimate is well above the consensus estimate of $3.88, but includes some benefit from one-time items.
Free cash for the year is expected to total between $600 million and $700 million.
Big things are happening in 2021
The criticism of XPO in recent years has been that the business is too complex, with too many moving pieces, which has led to a lack of investor interest. In December, the company announced plans to split itself into two independent companies in hopes of simplifying the investment story and boosting the valuation.
The breakup is on track to be completed before year’s end. Transportation, which accounts for about 60% of revenue, would house the LTL and truck brokerage businesses and rank as a top-three provider of both services in North America.
The LTL business, though in the top three in terms of revenue, commands less than 10% of the fragmented, $40 billion North American industry, giving it plenty of potential for growth. In the brokerage business, no one customer accounts for more than 9% of total revenue and no end market more than 23% of total revenue, giving the business low concentration risk.
Logistics, though smaller, will likely be the faster grower. The company is trying to position itself as the shipping and warehousing operation for retailers and e-commerce companies attempting to compete with Amazon but that don’t have the size to operate a logistics operation at scale on their own.
Nearly 40% of XPO’s logistics revenue is tied to e-commerce and retail, with food and beverage, consumer packaged goods, and consumer tech each accounting for at least 11%.
XPO is an underappreciated tech story as well. The company said the number of shipments handled by robotics in 2020 was five times higher than in 2019, with more than a quarter of North American e-commerce direct-to-consumer volume shipped via robotic automation in 2020. XPO plans to double the number of robots in warehouses over the next year, which should mean some initial costs but help drive productivity improvements over time.
How XPO can win
XPO’s businesses are performing well, but you’d never know it based on the company’s valuation. The company trades at an enterprise value 12.9 times EBITDA. By comparison, trucking specialist Old Dominion Freight Line trades at 21.6 times EBITDA, and logistics standout C.H. Robinson Worldwide at 16.9 times EBITDA.
That gap has persisted for some time now, and it’s the big reason XPO intends to split into two more-focused companies in the months to come.
Today, XPO appears to have multiple ways to win. Looking at the growth forecast, the stock should be set up well to run higher even without factoring in the breakup. And if the company is correct in thinking that the breakup will alleviate some of the confusion surrounding the business and allow each of the two units to trade at multiples similar to their peers’, that would add fuel to push the stock higher.
XPO is positioned to deliver for investors in 2021.
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