XPO Logistics: XPO Stock Dilution Is Not Going To Happen

- July 15, 2016

imageWhen a stock falls 3.5% on a day when the market jumps 0.5%, investors tend to notice, and ask questions. XPO Logistics (NYSE:XPO) was the lucky stock on Thursday. And as a result of this dismal performance, many started to form their own conclusions that something bigger is driving the loss.

That “something” is a large offering of sorts, or new issuance of debt. If XPO were to do so it would completely overshadow the profits it will report in the coming quarter. Given this fact, it’s no wonder shares fell 3.5% on Thursday, with investors clearly worried.

XPO stock dilution?

On July 6 XPO Logistics filed a S-3 that will allow it to offer XPO stock or increase debt at some point in the future. Given the company’s history, the filing sparked concern that XPO Logistics is once more preparing for a surprise offering to dilute the stock even more. Keep in mind that XPO’s shares outstanding have increased more than 250% since the beginning of 2014

As a result, the concerns are reasonable. The only problem with the dilution argument is that all of XPO’s recent offerings have come in response to large acquisitions of Norbert Dentressangle and Conway. Both acquisitions have closed with no additional funding needed.

Thus, if XPO were to dilute the stock it would be for another large acquisition. The company’s Chief Strategy Officer Scott Malat told me back in February that the company is “not focused on M&A at all. We are focused on deleveraging after all our big acquisitions.”  

XPO Logistics: The offering makes no sense

Moreover, XPO has $280 million in cash, will be profitable from this point forward, and 73% of its debt does not mature until after 2021. Therefore, XPO does not need additional cash.

As a result, the idea that XPO Logistics is about to dilute its stock sounds great to shorts and XPO stock bears, but in reality, it is not going to happen. XPO is not acquiring, and therefore it makes no sense whatsoever. The filing itself keeps the company’s options open.

Anyone who has followed XPO Logistics during the Bradley Jacobs era, or knows Jacobs, is well aware that he is a man who likes to keep his options open. It does not mean that he acts on those options.

Hence, I would not read too much into XPO Logistics’s S-3 filing. The economics of an offering make no sense. What makes sense is using the selling pressure to buy XPO stock at a cheaper price.

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Something else that’s important to keep in mind are the statements from my most recent conversation with XPO management.

I was straight up told that XPO will not do another offering anytime soon because the economics did not make sense. Jacobs specifically mentioned that offerings are usually best when the stock is inflated and the price represents a good opportunity for the issuer.

At just 2x EBITDA for 2018 it makes no sense to offer shares. Malat was very animated towards the fact that XPO stock has fallen 2-3x more than truck brokerages that operate exclusively in the U.K., despite the company’s profit exposure to the pound being at roughly 1% of EBITDA.

Furthermore, XPO management seemed very confident and excited to showcase its newfound profits in the coming quarter. An offering would overshadow those profits.

Yes, management still tries to sell investors on the “adjusted” numbers, but also acknowledges that actual EPS, net income, and positive free cash flow will likely do wonders for the stock price. Investors will then begin to trust XPO’s adjusted numbers.

All things considered, it would be the dumbest decision in Jacobs’s tenure to dilute XPO Logistics stock right now. And while many investors have no patience and are oblivious to how fast XPO has grown — and that hiccups should be expected with such growth — Jacobs is not a man who makes a lot of business mistakes.

The bottom line is not to worry about the S-3. An offering is not going to happen, but actual profits will be seen in the coming quarter.

 

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  1. By A Big Bet On XPO Stock on July 19, 2016 at 4:38 am

    […] on XPO stock. And apparently, I timed it just right. Aside from the fact that XPO Logistics is unlikely to dilute its stock with an offering, XPO will finally create profits from this quarter […]

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