XPO Logistics Inc

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.

Decent Performance in Q3FY21 (For the Quarter Ended 30 September 2021)

• From Q3FY21, XPO operates under two reporting segments, reflecting the spin-off of its logistics segment: North American Less-than-Truckload, and Brokerage and Other Services.
• The company has recorded an increase in its revenue to $3.27 billion from $2.68 billion in Q3FY20.
• In the North American truck brokerage segment, XPO recorded a growth in gross and net revenue by 62%, on a 37% increase in load count per day.
• XPO’s North American Less-Than-Truckload segment generated revenue of $1.07 billion compared with $933 million in the pcp, which reflects an increase in average weight per day and yield.

Exhibit 1: Performance Trend

Source: Analysis by Kalkine Group

Eyeing Big in Its North American LTL Business

In a move to boost the network efficiencies as well as drive growth in its high-ROIC LTL business, XPO is implementing a company-specific action plan. The company is eyeing at least $1 billion of adjusted EBITDA in LTL in 2022.  Additionally, the company intends to invest further capital over the next 12 to 24 months to expand its North American LTL door count by around 6% in key metros, following the 264-door Chicago Heights terminal it has opened recently.

The company is also eyeing at substantially increasing production capacity at its trailer manufacturing facility in Arkansas and it has expectation of nearly doubling the year-over-year number of units produced in 2022.

Moreover, it is aiming at improving network flow with selective freight embargoes and driving pricing by pulling the January 2022 General Rate Increase forward to November and instituting accessorial charges for the detained trailers, oversized freight as well as special handling.

Decent Liquidity Position

For Q3FY21, the company generated cash flow from operating activities of continuing operations of $250 million and free cash flow of $185 million, a non-GAAP financial measure. Further, the company holds more than $1.2 billion of total liquidity as of September 30, 2021, including $254 million of cash and cash equivalents and around $993 million of available borrowing capacity.

Deepen Relationship with Cainiao Network

XPO, on 20 October 2021, expanded its relationship with Cainiao Network, the logistics arm of Alibaba Group. As per the new agreement, XPO will utilize its extensive experience with omnichannel supply chains to assist Cainiao to optimize operations through the usage of the XPO Connect digital transport platform. This will be done to boost visibility, efficiency and sustainability.

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.

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 FY16-20 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 50.72% 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 13.19% and 9.56%, 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 could have an impact on its fuel surcharge revenue and could adversely affect its profitability. Further, it is susceptible to the broader economic downturn in the global economy.

Outlook

The company expects to achieve adjusted EBITDA in the range of $300 million to $305 million in Q4FY21, implying adjusted EBITDA between $1.228 billion to $1.233 billion for FY21. Resultantly, the midpoint of the updated full-year guidance increased to $1.231 billion — $16 million higher than the prior midpoint.

Further, XPO forecasts adjusted diluted EPS of $4.15 to $4.25, from a prior target of $4.00 to $4.30, and also expects achieving free cash flow of $425 million to $475 million, from a prior target of $400 million to $450 million.

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

Technical Overview:

Chart:

Source: REFINITIV

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

Stock Recommendation

XPO has delivered 9-month and one-year returns of ~+3.90% and ~+16.71%, 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 decent outlook as well as higher revenue in Q3 FY 2021 on the YoY basis.

Considering the aforementioned factors, along with its decent outlook and healthy liquidity position, we give a “Buy” recommendation on the stock at the current market price of $72.44 per share, down by 4.98% on 30^th November 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