Let me tell you about XPO Logistics (XPO on the NYSE), which is my newest addition. As you can tell, from it being on the NYSE, this is no penny-stock, although it was just founded 2011. XPO is a logistics company. What that means is that it is essentially a middleman between companies who want to ship something and the companies who own the shipping (trucks, ships, etc). Shippers contact XPO with loads to move, and XPO arranges to have the loads moved. The good news is that XPO doesn’t have to own the means of shipping. They are the opposite of capital intensive.
XPO keeps the spread between what it charges the shipper and what it pays to get the load shipped. It sets up more than 25,000 deliveries per day, mostly by truck, making it the fourth-largest truck broker in the country.
The freight and shipping market is highly fragmented, with the largest player holding just a 22% market share, and there are few other large players. The rest of the market is shared by small operators: There are more than 10,000 licensed truck brokers in the U.S., but only 25 generate more than $200 million in revenue. XPO’s strategy is to grow rapidly by rolling-up the little competitors. They believe that size can convey a significant advantage in efficiency.
Typically, growth by acquisition and attempts to roll-up an industry often fail, but there are many reasons to think that XPO could succeed. In spite of its brief history, XPO has made huge strides toward its growth goals.
You have to think of both Gross Revenue and Net Revenue with this company. Gross Revenue is what they receive from the shipper, and Net Revenue is what’s left after they pay someone to deliver the goods.
Now Gross Revenue was just $177 million in 2011, and the current revenue run rate based on last quarter is $2,500 million ($2.5 billion). That up 14x(!) in three years.
The Net Revenue is growing even faster. Here’s their Net Revenue for the past seven quarters (not years).
$16
$19
$35
$53
$58
$121
$175
That’s up 11x in a year and a half, and is five times the revenue from the same quarter last year (up 400%)
XPO aims to generate $7.5 billion in Gross Revenue and $425 million in EBITDA in 2017. That’s a huge step up from revenue of $702 million and an EBITDA loss of $28 million in 2013, but still may be underestimating.
Their EBITDA the last three quarters, by the way, has been $0.7 million, $14.1 million, $24.2 million. With EBITDA growing like that, they won’t be showing losses for long. (Loss this quarter was 13 cents, down sequentially from 22 cents)
To meet those goals, XPO is opening new offices and hiring sales talent, which it calls cold starts. Start-up requires very little capital. Thus far, it’s opened 24 new offices, though the bulk of its growth will likely come from acquisitions. In the past two years, it has made 11 acquisitions, including the $355 million purchase of Pacer.
The CEO, Bradley Jacobs has an incredible track record of building businesses. (He was born in 1956, which makes him just 58 in 2014, so he’s still young enough to be motivated and enthused). He’s already built four billion-dollar enterprises from scratch. Early in his career, he apparently built a large oil brokerage company as well as an oil trading company. After that, he helped grow United Waste Systems into the fifth-largest solid-waste management company in North America and sold it to Waste Management for $2.5 billion. Then he launched United Rentals, which he developed into the largest construction equipment rental company in the world.
The COO worked with Jacobs at United Rentals and United Waste. The CFO and chief strategy officer are Wall Street veterans focused on the transportation industry, which should be especially helpful in raising capital. The leaders of both Strategic Accounts and Technology were captured from competitors. And all these insiders should be highly motivated as insiders own more than 29% of the shares.
XPO has a $2 billion market cap. With only $400 million in trailing Net Revenue it’s at 5 times Revenue, and it had losses over the past year, so it looks expensive. (But nothing like MBLY at 65 times Revenue!). However XPO is growing so quickly that trailing values seem less useful than looking forward a short way.
The current run rate is $700 million in Net Revenue per year, but as we pointed out, this quarter’s Net Revenue was five times what it was the year before, so we can assume it will at least double in the next year. Of course, the share count will likely also rise as the company sells shares to pay for acquisitions. but even so…
Note that a major reason for investing in this company is Jacobs, and if he should leave, the company would be much less attractive.
Here is my compilation from the Sept quarter results, mostly from the press release:
Gross Revenue up 241% to $662.5 million.
Net Revenue up 403% to $175.1 million. [Net revenue is gross revenue (or what they are paid to transport something) less the cost of transportation and services that they purchase.]
Organic Revenue up 48% company wide.
Adjusted Net Loss was $7.3 million, or 13 cents per share. This improved from $10.9 million, or 45 cents per share a yr ago, and 22 cents sequentially.
Adjusted EBITDA improved to a gain of $24.2 million from a loss of $7.1 million a yr ago.
Cash was approximately $690 million.
Reaffirms Full Year 2014 Financial Outlook
The company has reaffirmed its full year 2014 outlook for an annual revenue run rate of more than $3 billion by December 31, and an annual EBITDA run rate of at least $150 million by December 31.
CEO Comments
"The third quarter was transformational for us on many fronts. We raised $1.2 billion of capital to fund our growth. We generated a net revenue increase of more than 400%, reflecting the benefit of acquisitions and 48% organic growth. And we turned in our strongest adjusted EBITDA performance to date, $24 million, which reflects less than a month of owning New Breed, our largest acquisition so far. We delivered 58% organic growth in our freight brokerage business, and more than doubled the revenue run rate of our brokerage cold-starts in 12 months to $250 million. Most important, our entire organization is gelling into one integrated operation.
"All of our acquisitions are on track and thriving. In September, we gained critical mass when we acquired New Breed. Our contract logistics business is off to a great start, ahead of plan in its first month out of the gate. In July, we acquired ACL, which recently had a big e-commerce customer win as part of XPO Last Mile. And in intermodal, our team is doing a very good job of meeting shipper requirements in a congested rail market. We`ve made significant gains in intermodal customer satisfaction and proprietary IT development.
“Weve built a range of technology-based supply chain services that has grabbed the attention of shippers in North America. And were currently in discussions with a number of attractive acquisition prospects in a very active pipeline”
Results by Business Unit
Freight brokerage: Our freight brokerage business generated total gross revenue of $518.7 million for the quarter, up 239.8%. Net revenue margin grew to 20.8%, from 18.1% in 2013. Third quarter operating income improved to a gain of $2.0 million, compared with a loss of $3.4 million a year ago.
Contract logistics: Our contract logistics business generated net revenue of $50.1 million and operating income of $4.5 million. The New Breed acquisition to start this was completed in September.
Expedited transportation: Our expedited transportation business generated total gross revenue of $36.5 million for the quarter, up 45.4%. Net revenue margin grew to 30.2%, compared with 18.1% in 2013, Third quarter operating income increased to $2.9 million, from $1.7 million a year ago.
Freight forwarding: Our freight forwarding business generated total gross revenue of $59.7 million for the quarter, up 212.2%. Net revenue margin was 10.5%, compared with 13.8% in 2013. (The increase in total gross revenue and the decrease in net margin percent were due in part to the consolidation of the former Pacer freight forwarding operations, which shifted the revenue mix toward higher-revenue, lower-margin international transactions.) Third quarter operating loss was $20,000, compared with a loss of $2.6 million a year ago.
Expands Freight Brokerage Network with Cold-start and State Incentives
The company announced the further expansion of its freight brokerage network with the addition of a cold-start location in Denver. The company also announced that it has been approved for tax incentives to create up to 88 jobs at its Kentucky brokerage location; and has been approved for an economic incentive package to create up to 125 new jobs at its Missouri brokerage location.
About XPO Logistics
XPO Logistics, Inc. (XPO) facilitates more than 33,000 deliveries a day and is the fourth largest freight brokerage firm, the third largest provider of intermodal services, the largest provider of last mile logistics for heavy goods, the largest manager of expedited shipments, and the leading provider of highly engineered, technology-enabled contract logistics. Additionally, the company has growing positions in managed transportation, global freight forwarding and less-than-truckload brokerage.
XPO has 199 locations and approximately 10,700 employees. Its four business segments - freight brokerage, contract logistics, expedited transportation and freight forwarding - utilize relationships with ground, rail, sea and air carriers and other suppliers to serve over 15,000 customers in the manufacturing, industrial, retail, technology, aerospace, commercial, life sciences and governmental sectors. The company has more than 4,000 trucks under contract, and has access to additional capacity through its relationships with over 28,000 other carriers.
All in all this sounds like a manic growth rate and a company that would be a lot of fun to work for as well as invest in.
Best to you all
Saul
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