XPO Logistics Still On Pace To Deliver Big Returns For Shareholders

- June 23, 2016
Source: XPO

Source: XPO

 

I’m really torn between the implications of tonnage declines for XPO Logistics (NYSE:XPO) , and whether or not it really matters. Analysts are expecting $3.8 billion in revenue this quarter; XPO’s biggest number yet. If tonnage is down, how much does that affect revenue? And if XPO misses by $50 or $100 million, does Wall St even care?

Fact is that Wall St. has been rolling its eyes at XPO’s revenue for the last year now. I think the more important number will continue to be EPS, and to a lesser extent gross margin. Just about all investors read right through adjusted EBITDA. And actually, the company’s ongoing emphasis on adjusted EBITDA has likely played a big role in its stock loss.

XPO investors want clarity

With that said, I sent some very tough questions to the executive team at XPO Logistics a few weeks back. While Scott Malat has been in contact and insists he just forgot, I am assuming that these are too tough to answer, and that XPO’s legal team has intervened. For me, this is concerning.

Over the last year I have asked Jacobs, and Scott, why they keep pushing adjusted EBITDA? Furthermore, I have been very critical of their last two quarters, and they have answered many of those tough questions that I have then shared here on TTS. There has been a similar tone with every response:

Q. Why won’t you use free cash flow, EPS, or EBITDA without the adjustments to report bottom line performance? (That’s what investors want)

A. We want investors to see that our operations are and will be profitable. We want investors to see that there will be large profits and realize that the things preventing us from reaching profitability are temporary.

Q. How do you explain this, that, and the other related to XPO stock price? What about problems with employees? Unions? Cost-control? (The reply has almost always been the same).

A. When you grow from a $300 million company to a $15 billion company in four years, you are going to have problems. It is not a puzzle you can just piece together. It takes time (that’s why we share adjusted EBITDA).

That said, I’d be lying if I said XPO stock price has not bothered me over the last year. But, Jacobs and Scott have always been consistent in how they answer questions, and while they have not responded to my current questions, I think it has more to do with the frustration of answering the same questions over and over, along with the fact of some being true (right now, but not long-term).

Don’t forget how fast XPO has grown.

I’d be willing to bet that no company ever has grown as fast as XPO over the last five years. Put it in perspective: XPO has gone from “mom and pop trucking stop” to top 10 provider of transportation and logistics solutions. It now has 1,440 locations in 33 countries. Five years ago it had a dozen locations in one country.

So to expect a smooth ride is unrealistic. However, I still have no doubt that the management team Jacobs has built, along with Jacobs himself, will correct problems, and all of these extra items that are weighing on EBITDA and preventing net profit will eventually end.

I don’t know when. It could be six months or another year, but with XPO priced appropriately for a company with a number of problems (and valued like a company that will never get out of these problems) I am confident in the investment in Jacobs & Co. that they will do what they have done so many times in the past.

Lastly, it is reassuring that the worst days have come and gone. The company’s debt is now hovering right around $5.5 billion, and should not go up as Jacobs works to integrate what he already has. I don’t think Jacobs would risk adding another big piece to the XPO, ND, Conway puzzle unless it is a highly profitable piece.

The risk of stock dilution is essentially non-existent. There is no value in diluting the stock, not with XPO priced at 3x future EBITDA. In retrospect, XPO is a rare company that is now priced lower than the multiples in which it acquired components. That in itself suggests great stock value in the stock.

Have to be patient

We just have to be patient and let these very natural issues run their course, and when it is said and done, XPO Logistics investors should realize a company that is much larger, but very much like United Rentals (NYSE:URI) , a company that went through all of the same problems as XPO; Jacobs grew it the same way. The only difference is that investors did not see it as much with URI, where most of its growing pains came before going public.

Therefore, I expect XPO to be dead money for a while, until figuring out these problems and it reflecting on the company’s bottom line. But, the market will realize progress as it is happening, and as such, XPO stock will follow suit.

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  1. […] profit in Q2, it can finally be valued like a profitable company. Thus, XPO is very likely to be one of the best performing stocks in the entire market to close […]

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    XPO Logistics Still On Pace To Deliver Big Returns For Shareholders

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