Undervalued XPO Logistics Gets Even Cheaper
XPO Logistics (NYSE: XPO) had a great quarter but there are a number of things hanging over the market that has shares moving lower in the wake of the report. The number one, perhaps, is the fact XPO Logistics is a late-reporting company in the realm of truckers, LTL shipping, and logistical needs. The company’s results are fantastic and other details support the idea of accelerating revenue and profits but that was expected. Integrated shippers from J.B. Hunt (NASDAQ: JBHT) to Old Dominion Freight Line (NASDAQ: ODFL) to truckers like Knight-Swift (NYSE: KNX) and LTL specialists like Saia (NASDAQ: SAIA) and ArcBest (NASDAQ: ARCB) all foreshadowed the news. The takeaway is that XPO Logistics solid quarter, guidance, and growth activities became a sell-the-news event despite the underlying strength in the business and the industry. In our view, this is opening up an attractive entry into stock we’d like to own.
XPO Logistics Navigates Supply Chains Issues, Raises Guidance
XPO Logistics reported $3.27 billion in net consolidated revenue which is good for a gain of 22% over last year and a company record. This comparison is adjusted to account for the divestiture of logistics business over the summer so doesn’t readily compare to the previous year or 2019’s actual report. The figure does compare well with the Marketbeat.com analysts consensus and beat that figure by 580 basis points.
The revenue was driven by strength in both the Brokerage and LTL segments which were supported by higher pricing and volume demand. On the brokerage end of the business, the company says it has more than 3 times the number of users versus last year, a gain that resulted in a 37% increase in average loads. On the LTL side, revenue is up 6% YOY but was offset by higher costs. Moving down to the margin, the company’s operating ratio increased versus last year due to the continued use of purchased capacity. The company has been working hard to improve its capacity as well and says these headwinds are already normalizing.
Turning to the income and earnings, GAAP income fell versus last year and resulted in a surprising loss due to reinvestment in the business. The company is expanding its trailer production, putting more drivers through truck-driving-school, and working to increase the number of tractors on the road which are all net positives to us. On an adjusted basis, the company’s earnings and cash flow are more than double the previous year with the $0.94 in EPS beating consensus by a penny.
XPO Logistics Guidance Falls Short Of Expectations
XPO Logistics raised its guidance for full-year EBITDA but there is a problem for the market. While EBITDA is expected to be roughly 1.3% better than the previous forecast it is much less than what the market was hoping for. Worse, the EPS adjustment only narrowed the range, not increased it, suggesting cost issues would persist through the end of the quarter. As for the analysts, the analysts are expecting $4.23 in adjusted earnings versus the guidance of $4.15 to $4.25 so nothing more than what was already expected.
The Technical Outlook: XPO Logistics Falls To Support
XPO Logistics was already trading at a discount relative to its peers and that discount got deeper today. XPO Logistics trades at roughly 21X its earnings consensus while the bulk of trucker/logistics services are trading between 37X and 42X their earnings. Shares of the stock are down more than 8.5% in early trading but are well above key support levels. Assuming price action can maintain support at the $77.50 level we’d expect to see it begin to recover fairly quickly. If not, price action may bob along at current levels until some other catalyst emerges.
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