I don’t have any idea how to value XPO. They don’t talk about EPS much.
Great question, A.J. They do talk about earnings a lot, but in terms of EBITDA rather than EPS.
I personally don’t like to get into the weeds with valuation, as I think there are just way too many assumptions that go into it: my inclination is more towards trying to be “generally right” rather than “precisely wrong.” If you really wanted to build a model, I think you could probably estimate free cash flow from the 2019 EBITDA and revenue figures, along with the other assumptions presented in the conference call like additional debt, capex, etc. (there were a lot of questions about the company’s internal model from analysts, as you might imagine), and then discount those cash flows based on your confidence in management’s estimates and your own investment goals.
But here’s a much simpler back-of-the-envelope way to look at it: XPO just bought out Norbert Dentressangle for about 9 times 2015 EBITDA, which I’ve seen a TMF analyst call a “reasonable” price. So if you were to assume the market will value XPO at that level, that would give a market cap of 9 x $1.5B = $13.5B in 4 years if you believe management’s EBITDA estimate. The market cap today is just over $4B, so that’d translate into about 35% annualized appreciation in share price if management hits its targets and the number of fully diluted shares remained constant (they obviously won’t). So apply a discount you believe is reasonable to account for additional shares and your degree of confidence in management’s estimates.
I’ve also seen a TMF analyst roughly estimate that the company, if it were valued in line with peers, might have a market cap of about 0.8 * revenues (and indeed, that’s about what CH Robinson is priced at today). Using that rule of thumb with management’s goal of $23B of revenue in 2019, one would arrive at a market cap of around $18B. That makes me think there’s some margin of safety in the above estimate of $13.5B.
So my own personal conclusion is that today’s price is reasonable if the company can come close to achieving its goals.
I have no idea, of course, if any of this will play out, or where the company will be in 4 years, or how the market will value it, or how many additional shares outstanding there will be. But there is significant insider ownership (Jacobs owns 20% of shares), and I believe there are also bonuses based on EPS and share price targets, so it seems like management’s interests should be well aligned with ours.
That’s how I’m looking at it, anyway.
Neil
