XPO – May 2015 Portfolio Review #4
XPO Logistics (XPO on the NYSE), was a new addition in November, about 6 months ago. I bought a lot at $36.25, and about a sixth more at $37.25, and little dribs and drabs on the way up, with my highest small purchase at $45.75. It closed last week at $49, up 35% in the six months since my original and major purchase. It has grown to be my sixth largest position and about 6.8% of my total. The big news has been the purchase of a large French logistics company, announced about a week ago (and extensively discussed on the board) and just today, the purchase of a drayage logistics company in the US.
As you can tell, from it being on the NYSE, XPO is a substantial company although it was just founded 2011. It’s 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 thus the opposite of capital intensive, and are what’s called an “asset-light” company, meaning they don’t have to own the trucks, but hire independent contractors to do the trucking, etc.
XPO keeps the spread between what it charges the shipper and what it pays to get the load shipped. Four months ago it was setting up more than 25,000 deliveries per day, mostly by truck, making it the fourth-largest truck broker in the country. Who knows how many they set up now!
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 smaller profitable 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, and, in spite of its brief history, XPO has made huge strides toward its 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, which makes it like Gross Margin (the way I think about it).
Gross Revenue was just $177 million for the entire year 2011, but in 2014 they had $2356 million (over $2.3 billion). That up 13x(!) in three years.
The Net Revenue is growing even faster. Here’s their Net Revenue for the past nine quarters (not years). That’s what they take home before operating expenses.
And they just announced $262 million for the first quarter, which was held back by winter weather and the West Coast port closures, but was still up 16 times from the $16 million two years ago.
NOW GET THIS: In November when they reported Sept 2014 results, they made the wild estimate that they aimed to generate
$7.5 billion in Gross Revenue
$425 million in EBITDA……. in 2017.
That was a huge step up from:
$702 million in Gross Revenue
($28 million) EBITDA loss in 2013.
Well in their earnings report today, they raised those estimates to run rates of:
$9.5 billion in Gross Revenue
$625 million in EBITDA……. Not in 2017, but by the end of this year!!!
Their EBITDA for 2014, by the way was $81.4 million.
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 20 or 30 new offices, though the bulk of its growth will likely come from acquisitions.
The CEO, Bradley Jacobs has an incredible track record of building businesses. (He was born in 1956, which makes him just 59 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 $3.8 billion market cap. With only $857 million in trailing Net Revenue it’s at 4.4 times Net Revenue, and it had losses over the past year, so it looks expensive. And it is losing money. However XPO is growing so quickly that trailing values seem less useful than looking forward a short way.
The current run rate, based on averaging the last two quarters, is $1.1 billion in Net Revenue per year, but 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 Mar quarter results, mostly from the press release:
Gross Revenue up 149% to $703.0 million.
Net Revenue up 349.% to $262.2 million.
Adjusted Net Loss was $9.9 million, improved from a loss of $16.7 million.
Adjusted Loss of 13 cents per share, improved from a loss of 40 cents per share.
Adjusted EBITDA was $29.2 million for the quarter, up from $0.6 million.
Acquired Bridge Terminal Transport - one of the largest asset-light drayage providers in the United States. The transaction is expected to close in the second quarter and is expected to be immediately accretive to earnings before the benefits of cross-selling and other synergies
The purchase price is $100 million, with no assumption of debt. BTT had revenue of $232.0 million for the last 12 months. The purchase price is 8.1 times EBITDA of $12.4 million.
In business for 33 years, BTT arranges ground transportation through a network of 28 terminals and approximately 1,300 independent owner operators. BTT has approximately 250 employees and 1,800 customers, including many multinational companies, with its top ten customers having an average tenure of 19 years with BTT. Our purchase of BTT will almost triple our drayage capacity.
Raises Full Year Financial Targets - In light of the two recent acquisitions, the company has raised its 2015 targets to an annual revenue run rate of at least $9.5 billion and an annual EBITDA run rate of at least $625 million by December 31.
CEO Comments - Our first quarter performance reflects the resilience of our diversified service offering. We generated strong results in our last mile and expedite businesses, and in our logistics segment. These gains were offset by a weak spot market for freight brokerage and the disruption of our intermodal business due to the West Coast port slowdowns. March was a more broadly favorable operating environment, with an upswing that continued into April.
In light of our recent M&A announcements, we’ve raised our 2015 targets for revenue and EBITDA. We’re now targeting a year-end revenue run rate of at least $9.5 billion, and EBITDA of at least $625 million - more than twice the EBITDA target we set just three months ago.
Rebrands All Services as XPO Logistics - The company has rebranded all its services under the single global brand of XPO Logistics.
Launches New Website at www.xpo.com
I know it’s still not profitable but I believe it will be very soon. You’ll wonder why I’m so enthusiastic about XPO, when they still have losses. First, they are growing incredibly quickly. Second, their loss this quarter was $10 million but their Gross Revenue was over $700 million, or 70 times their losses. The loss was roughly 1.4% of revenue, and easily overcome. That’s a completely different ballgame than WPRT where losses were well over 130% of revenue (as I remember). That’s almost 100 times as much loss proportionally.
Hope you find it interesting.
Best to you all
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