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XPO Logistics: Corporate Split Could Unlock Value, but the Stock isn’t Cheap
Stock Analysis & Ideas

XPO Logistics: Corporate Split Could Unlock Value, but the Stock isn’t Cheap

XPO Logistics (XPO) is a prominent U.S.-based provider of freight transportation services. The company utilizes its proprietary technology to transport goods efficiently through its customers’ supply chains, largely by supplying less-than-truckload and truck brokerage services.

The company serves 50,000 customers across the globe. Besides its high-scale capabilities, the company’s exposure to secular growth trends (such as e-commerce sales growth) allows it to benefit from the first-mover advantage in each such trend amid its close relationships with innovators in each field.

Latest Developments

XPO’s latest earnings results came in quite strong, boosted by the sky-high demand levels for transportation services amid the ongoing supply chain crunch. The company’s revenues grew to their all-time highest levels, up 14.3% to $3.36 billion in Q4 versus 2.94 billion for the same period in 2020.

Additionally, the company’s adjusted net income for the quarter came in at $155 million compared with $54 million last year for Q4. On a per-share basis, the company earned $1.34 and $0.53 during these two periods, respectively.

XPO’s North American truck brokerage business keeps outpacing the industry growth by far, according to CEO Brad Jacobs. XPO’s Connect digital brokerage platform has been fundamental to the company handling the 29% load growth it achieved in 2021 year-over-year.

With demand for XPO’s services remaining robust, the company expects to keep delivering double-digit volume growth in North American truck brokerage through the next few years. Accordingly, the company expects FY2022 adjusted EBITDA of $1.36 billion to $1.40 billion and adjusted EPS between $5.00 and $5.45.

Is The Stock Fairly Valued?

XPO recently announced plans to split its tech-enabled brokered transportation services from its North American less-than-truckload (LTL) business. It also plans to dispose of its European business and North American intermodal operations, as these moves are anticipated to unlock meaningful shareholder value. The stock rallied on the news, currently hovering close to $70.

At the midpoint of management’s guidance, the current stock price implies a P/E of 13.3. In my view, while this appears to be an attractive multiple, investors need to note that XPO’s business model is subject to very thin margins. For example, even with 2021’s strong performance for the company, net income margins reached just 2.61%. Hence, the firm could easily report losses during unfavorable market environments. Consequently, I don’t share Wall Street’s more optimistic upside potential.

Wall Street’s Take

Turning to Wall Street, XPO Logistics has a Strong consensus rating, based on 13 Buys and one Hold assigned over the past three months. At $98.58, the average XPO Logistics stock forecast implies 39.87% upside potential.

Conclusion

XPO Logistics is a quality company in the transportation industry. The company is currently enjoying the tailwinds of its technical capacities combined with the ongoing demand boom for its services.

Overall, I believe the stock could have further upside based on management’s recent plans to shift around the company’s segments. The tech business should be able to attain a higher valuation multiple, unlocking shareholder value. However, I still think that the core transportation segment should be valued at a more humble P/E due to its razor-thin margin prospects. Accordingly, I am neutral on the stock.

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