XPO Details

XPO Logistics, Inc. (NYSE: XPO) is engaged in the business of freight transportation. It is mainly a top-three provider of truck brokerage and less-than-truckload (LTL) capacity in North America. XPO assists companies in their supply chains by transporting their goods using pioneering technology. With a network of 744 locations globally and around 40,000 employees, it provides the truck capacity to 50,000 shippers. It operates through two broad segments that include Transportation and Logistics.

Healthy Performance in Q2FY21 (For the Quarter Ended 30 June 2021)

• The company has recorded an increase in its revenue to $5.04 billion from $3.50 billion in Q2FY20.
• The transportation segment generated revenue of $3.19 billion against $2.13 billion in the PCP, while the logistics segment revenue increased to $1.88 billion from $1.40 billion in Q2FY20.
• The company witnessed a rebound in net income attributable to common shareholders to $156 million compared to a net loss of $132 million in the year-ago period.
• XPO generated cash flow from operations of $366 million and free cash flow of $282 million in Q2FY21 on a non-GAAP basis.

Exhibit 1: Performance Trend

Source: Analysis by Kalkine Group

Decent Liquidity Position

XPO holds overall liquidity of around $1.9 billion as of June 30, 2021, which comprises cash and cash equivalents of $801 million and an available borrowing capacity of around $1.1 billion. Besides, there is no substantial debt maturing until mid-2023 for the company. Further, it intends to deleverage to attain an investment-grade credit rating.

Opened State-of-the-Art Hub in Chicago

The company, on 18 October 2021, declared that it has opened a state-of-the-art less-than-truckload (LTL) service center in Chicago Heights to cater to the increasing demand from LTL customers. The hub spans across 150,000-square-foot with 264 dock doors to facilitate high volumes and ongoing growth. This strategic hub will also result in having a positive impact on customer service throughout its less-than-truckload network.

Spin-off Logistics segment

The company on 2 August 2021, completed the spin-off of its logistics segment through the distribution of the entire outstanding common stock of GXO Logistics, Inc. ("GXO") to XPO shareholders as they received one share of GXO common stock for every share of XPO common stock. Post the spin-off, XPO does not beneficially hold any shares of GXO’s common stock.

Pro-Forma Guidance

Driven by the momentum achieved in Q2FY21, the management has increased expectations for FY21 earnings in both segments. Resultantly, the management has raised the pro forma 2021 adjusted EBITDA targets for XPO and GXO. The pre-spin combined adjusted EBITDA target increased to between $1.875 billion to $1.915 billion, as decent performance in Q2FY21 led to higher expectations for both segments.

However, the management expects XPO alone to achieve adjusted EBITDA in the range of $1.195 billion to $1.235 billion in FY21, including adjusted EBITDA between $574 million to $614 million generated in the last six months of 2021. The company highlighted that the pro forma 2021 guidance excludes effects related to the planned spin-off of the logistics segment.

Meanwhile, the company will release its results for Q3FY21 on November 2, 2021.

Key Metrics

The company’s gross margin increased steadily over the years to 51.7% in FY20 compared to 46.0% in FY16. Notably, the company’s cash conversion cycle has significantly improved over FY16 to FY20 as it reduced to 4.4 days in FY20 from 13.4 days in FY16.

Exhibit 2: Key Financial Metrics

Source: Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form ~50.67% of the total shareholding while the top four constitute the maximum holding. Notably, Jacobs Private Equity, LLC and Orbis Investment Management Ltd. are holding a maximum stake in the company at 13.20% and 9.77%, respectively, as also highlighted in the chart below.

Exhibit 3: Top 10 Shareholders

Source: Analysis by Kalkine Group

Key Risks

The company is exposed to various market risks pertaining to changes in interest rates and fluctuations in foreign currency exchange rates. Volatility in fuel prices would have an impact on its fuel surcharge revenue and adversely affect its profitability. Further, it is susceptible to economic recessions in North America and Europe.

Outlook

The company continues to benefit from prevailing growth in industrial demand and sustained recovery in supply chains from COVID-19. With the supply chains being compressed in E-commerce, which is resulting in increasing demand for LTL capacity. Further, the company continues to gain a strong share in the truck brokerage driven by its skill to offer dependable capacity and greater visibility through technology. The benefit of its cutting-edge digital freight platform is also driving revenue growth as well as margins as it provides its customers with its massive truckload carrier network along with an easy interface and clear pricing visibility. Additionally, XPO continues to focus on operational excellence through utilization of proprietary technology to increase efficiency, optimize routes and boost cross-dock productivity with XPO Smart™ that will aid in driving margins growth.

Valuation Methodology: Price/EPS Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Orange Color Line Reflects RSI (14-Period)

Stock Recommendation

XPO has delivered 9-month and one-year returns of ~+15.06% and ~+45.05%, respectively.

The stock has been valued using a Price/EPS multiple based relative valuation (on an illustrative basis) and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to peer average Price/EPS multiple (NTM basis) considering better ROE in Q2 FY 2021 on the YoY basis as well as decent outlook.

Considering the aforementioned factors, we give a “Buy” recommendation on the stock at the closing market price of $81.05 per share, down by 0.37% on 19th October 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices