Year-End #4 - A new addition, XPO

Investment Analysis Clubs Saul’s Investing Discussions
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XPO, a new addition

XPO Logistics (XPO on the NYSE), was a new addition in November, actually about 6 weeks ago. I bought a lot at $36.25, and about a sixth more at $37.25, and dribs and drabs on the way up. It closed last week at $42.60, up 17.5% in the six weeks since my original and major purchase. It has grown to be my 8th largest position and about 6% of my total. As nothing has happened since November, and there have been no news releases, the information hasn’t changed much from what I gave you in November.

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.

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, 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).

Now Gross Revenue was just $177 million for the entire year 2011, but the current annual 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). That’s what they take home before operating expenses.
$16
$19
$35
$53
$58
$121
$175

That $175 million is up eleven times what it was a year and a half ago, and is five times the net 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 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 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.

I know it’s still not profitable but I believe it will be very, very, soon. You’ll wonder why I was so down on a company like CTSO which was losing money, and so enthusiastic about XPO. Well, CTSO had revenue last quarter of $1.0 million and losses of $1.5 million (expenses of $2.5 million, or 250% of revenue). XPO had gross revenue of $662 million and losses of about $7.0 million to $10 million depending on whether you use adjusted or GAAP (expenses of about $670 million, or roughly 1% or 1.5% over Gross Revenue).

Hope you find it interesting.

Best to you all

Saul

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Thank you, Saul, for the excellent summary of XPO! This looks like a company shooting upwards in growth and with excellent proven management.

I took a small position in November and will add another soon.

Also, thank you for your excellent leadership on this board for the past year which has resulted in the best board in Motley Fool kingdom.

Jim

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Thanks Jim, very kind of you to say!
Saul

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Saul,

Thanks again for these great write-ups to see how you are thinking through the investment. I really appreciate the story, numbers and analysis you are giving us.

I had a quick question on XPO, which sounds like an interesting company and business model.

Fool Income Newsletter recommended C.H. Robinson (CHRW) on 4/8/14 @ $53. They appears to the “800” pound gorilla in the space, though it only has 22% of the marketshare. Now trading at $76, and a $11B market cap.

When you decided to invest in XPO, did you also look at/consider CHRW? If so, did you see something you liked more at XPO vs CHRW?

Thanks again
Chris

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I had a quick question on XPO, which sounds like an interesting company and business model. Fool Income Newsletter recommended C.H. Robinson (CHRW) on 4/8/14 @ $53. They appears to the “800” pound gorilla in the space, though it only has 22% of the marketshare. Now trading at $76, and a $11B market cap. When you decided to invest in XPO, did you also look at/consider CHRW? If so, did you see something you liked more at XPO vs CHRW?

Hi Chris,
I don’t follow the Income newsletter so I didn’t see the recommendation of CH Robinson. If I had seen it though, I probably would still have chosen XPO as I wasn’t looking for a slow growing dividend stock, but an exploding growth stock.
Best
Saul

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Thanks Saul for a terrific write up.

Have a great year in 2015 and that’s for all the participants on Saul’s board.
Mykie

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This is from my news feed at Schwab:

In a 13G filing on XPO Logistics (NYSE: XPO), hedge fund GIC Private disclosed a 10.53%, or 8,153,946 share, stake in the company. This is up 113.32% from the 3,822,472 shares held at the end of the latest quarter ending September 30, 2014.

I never know how to evaluate these. It obviously seems positive. And to take a 10% stake, they have to have a lot of confidence, but on the other hand, someone must have sold the shares that they bought so there’s a balancing opinion.

Saul

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Hi Saul,

Excellent writeup and thanks for reminding me (again!) about this one. I really like this business model and XPO seems to be challenging the incumbent nicely, as evidenced by the strong net revenue growth.

In addition to CHRW, the other key competitor is EXPD. Since XPO is not yet profitable, it helps looking at its price to sales ratio and comparing it with CHRW and EXPD:


------------------------------
ticker  P/S   Qtr Rev Growth
------------------------------
CHRW    0.83       4.5%
EXPD    1.38      10.8%
XPO     1.48     241.5%
------------------------------

Looking at the above, it would appear that XPO is still a very good deal. I really need to look into this one in some detail now. (Caveat - data from Yahoo! Finance, and not cross-checked with SEC filings)

Saul - a question which you may be able to answer: What is XPO’s secret sauce? How do they manage to get such phenomenal growth? Part of it must be coming because they might be working off a small base but they must have more to be able to compete with the gorillas in the room.

Anirban

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Hi Anirban,

Partly they are growing so fast because of acquisitions, but I think partly because of a couple pf unique factors: first I’ve heard mentioned that they have a big technology edge on their competitors (by that I’m sure they are referring to computers and software), and second, their genius of a CEO, who has done this several times before.

JMO

Saul

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Hi Saul,
I live in the Seattle area, home base for EXPD. I hears the CEO, Pete Rose, on local PBS finance interview show years ago and bought some stock afterwards. The stock ran up about 100% and then flat-lined. I held on a while longer but eventually sold my position. This all happened years ago and I haven’t checked on it since I sold it.

After a quick review of Yahoo finance info, it looks as if Rose retired. I have no idea if his leadership notions are still in place, but the stock price is still pretty flat for the last few years.

But here’s the deal, Rose was all about organic growth and technology. Claimed that EXPD had the best IT of all the competition and would remain the industry leader. Considered this a moat. I was not skeptical then (I worked in IT for 30 years), but I am less enthused now about IT as a competitive advantage, it’s just become too easy to create these applications, it’s increasingly difficult to maintain a significant IT lead in most industries.

The other thing Rose claimed was that acquisition strategy in the logistics business didn’t work (again, this was quite a few years ago, maybe 10 or more). He claimed that the integration problems out-weighed the gains. Apparently, Jacobs is proving him wrong on this account.

Just wondering if you’ve looked at EXPD as a comparison and have any thoughts about how XPO can maintain such dynamic growth while EXPD appears to be staid and steady at this point. I don’t see that much essential difference in the fundamental business other than EXPD is international while XPO is primarily domestic (well, North America anyway). Your thoughts?

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Just wondering if you’ve looked at EXPD as a comparison and have any thoughts about how XPO can maintain such dynamic growth while EXPD appears to be staid and steady at this point.

Hi Peter,
I don’t know what to say. I don’t know anything about EXPD or its history and I don’t follow the logistics industry. I just know what Jacobs has done so far with XPO, and so far his growth trajectory has been extraordinary. He also has the experience of having done this before in other industries, so he may be better at integration than Rose was.

Best

Saul

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XPO was not a presence back when I was in the industry, so I won’t comment on their specifics unless I dig out some answers. Based on years of experience buying shipping services from CH Robinson and many others, I offer some general comments that could be useful in understanding XPO.
The foundation of a good logistics company is excellent service and information. A good logistics company puts great effort into its relationships with both the trucking companies and the customers with goods to move; tracking shipments and other data, getting units when truck availability is tight, good clean trucks and drivers, on time deliveries, etc. If CEO Bradley Jacobs of XPO is building strong relationships, or at least supporting the XPO people who build the relationships, then XPO’s position is greatly enhanced when the next downturn occurs.
The shipping industry is strongly cyclical. During the falling and lean parts of the cycle, there is too much capacity so freight rates drop and marginal shippers leave the industry. During the recovery part of the cycle, profits accelerate when too little capacity causes freight rates to rise. During the fat part of the cycle, new shippers enter the market chasing high freight rates. Logistics companies tend to be somewhat insulated from the cycles.
Many shippers have specialized fleets with assets and training targeted at specific business. Palletized loads in over the road trucks may be the first option that comes to mind, but others include bulk liquid railcars, bulk liquid trucks, isotainers for semi-bulk liquid, bulk solid railcars, bulk solid trucks, semi-bulk supersacks; rail, truck, container ships crossing the oceans, emergency shipments by air, etc. Logistics companies need access to a wide range of shippers.
Falling oil prices should increase profits depending on how their contracts are written.
Drake54

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Brittle rock posted this excellent analysis, based on his own experience, on the XPO board. I’m reposting it here with his permission.

Saul

< I worked at Boeing in IT in various capacities over 30 years. As an analyst, I learned about lots of different operations in the company as we looked for automation opportunities. I was the lead analyst for shipping and logistics during a massive development project which was primarily focused on purchasing - but once you bought stuff, you had to get it to the factory (I also was the lead for receiving inspection).

Boeing buys a lot of big, heavy stuff. If you are shipping some humongous piece of equipment from South Carolina to Washington State you need special transportation equipment (often Boeing supplied). You also need to know the load capacity of every road and bridge, the clearance of every underpass, every local restrictions and so forth in order to plan a route for that shipment. Often something like this would involve both long-haul rail and tractors. Boeing did not rely on a third party for this, in fact, I doubt that any logistics or individual shipper in the country had a comparable database to Boeing’s.

But, if you’ve got small shipments, it is to your advantage to work with someone who can consolidate several shipments in order to provide a full load to the shipper. If it involves international shipments, the providers (both air and seaborne freight) sell container size capacity. If you can’t fill a container, you want to work with a logistics company that will consolidate several shipments into a single container. Everyone wins. As someone who needs a shipment, you get a low price by sharing unused capacity. The provider get full utilization of the containers. The broker gets the highest commission while saving everyone else money. There’s also customs, bonded warehousing services and a host of other things that most companies would rather turn over to a specialist as opposed to the cost of developing in-house expertise.

From what I’ve read, XPO is focused on US trucking. They seem to be happy to specialize on this segment of a highly fractured industry while not getting involved in international logistics. UPS, FedEx, Expediters Int’l and several other companies handle this business.

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New acquisition in last mile arena, which is immediately accretive.

GREENWICH, Conn. - February 9, 2015 - XPO Logistics, Inc. (“XPO Logistics,” “XPO” or “the company”) (XPO) today announced that it has acquired UX Specialized Logistics (“UX”), a North American provider of last mile logistics services for major retail chains and e-commerce companies.

The purchase price was $59 million, excluding any working capital adjustments, with no assumption of debt. UX had revenue and adjusted EBITDA of $113.2 million and $8.2 million, respectively, for the full year 2014. For the five years prior to acquisition, UX increased revenue at a compound annual growth rate of 19%. The acquisition is expected to be immediately accretive to earnings before the benefits of cross-selling and other synergies.

Founded in 1978, UX is a non-asset, last mile logistics provider that specializes in logistics for the home delivery and installation of heavy goods, including e-commerce delivery, and same-day delivery services…

http://finance.yahoo.com/news/xpo-logistics-expands-last-mil…

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This is from a public article on Bloomberg back in July 2014

XPO Pulls Off 500 Purchases While Bypassing Wall Street
July 30 (Bloomberg) – Brad Jacobs has negotiated 500 deals. …

Jacobs, 57, isn’t a Wall Street banker but he’s acting like one as he tries to turn XPO Logistics Inc. into the largest company in the transport-services industry through serial takeovers. Yesterday, he closed on two more deals, worth a combined $652 million, bringing to 13 the number of acquisitions since he became chief executive officer in September 2011. Before XPO, he used the same roll-up strategy, buying hundreds of companies, to build United Rentals Inc. and United Waste Systems Inc. into market leaders.

Missing from these deals are investment bankers. Jacobs uses staff to scout out and negotiate acquisitions, turning to Wall Street banks for financing only. Jacobs takes aim at industries that are fragmented, growing and where bigger is better. Investors have rewarded the strategy, as XPO’s stock more than doubled in three years. Revenue is projected by analysts to be $2 billion this year from $177 million in 2011.

“Figure out what the seller wants and give it to them,” he said in an interview, describing his negotiating style. “That’s not always the highest price, by the way. I want to establish us as the buyer of choice.”….

Trash Business
Jacobs first targeted the trash business for consolidation. He founded United Waste 25 years ago with the aim of combining local garbage collectors. Jacobs put in about $20 million in 1989. Eight years and about 250 acquisitions later, he sold the company to USA Waste Services Inc. – known today as Waste Management Inc. – for more than $2 billion.

Shortly after, Jacobs invested $50 million to start United Rentals, an equipment-rental company. It was one of the fastest operating companies to go from incorporation to initial public offering, listing on the New York Stock Exchange in December 1997, four months after it began. The company’s market value is now about $10.6 billion.
“Brad is a very big-picture thinker who has the strategic foresight to identify sectors of the economy that would benefit from scale,” Cary Kochman, head of North America M&A at Citigroup Inc., said in an e-mail.

Heavy Regulation
After United Rentals, he looked at for-profit education and health care, two big industries with high growth rates and low capital requirements. Eventually he avoided them because of their dependence on regulation. “If you were on the wrong side of regulators, they could put you out of business,” he said.

In 2011 he turned to the logistics business – again, big and fragmented, he said. The industry includes companies from CH Robinson Worldwide Inc., which helps customers find the best way to deliver their products, to truckload carrier Knight Transportation Inc. He invested $150 million into Express-1 Expedited Solutions, replaced the board and became CEO. From a market value of $75 million, the company now is worth $1.4 billion….

Broken Dreams
Unlike his earlier successes, the logistics industry may not suit Jacobs’s consolidation strategy, according to Jack Atkins, a Little Rock, Arkansas-based analyst at Stephens Inc. “As you look to the history of potential roll-ups in third-party logistics land, it’s the boulevard of broken dreams,” said Atkins, who maintains the only hold rating on XPO out of 14 analysts that cover the stock. “Roll-ups in this space have not gone well, and what long-term investors have been left with at the end of the day are businesses that have operations that don’t fit together in a cohesive strategy.” Jacobs said he has created systems to avoid pitfalls in integrating new companies.

No Bankers
One thing that distinguishes Jacobs from other CEOs on acquiring sprees: he doesn’t use bankers. “We don’t really need financial advice from banks. We need financing,” he said. “We have a lot of people who used to be bankers working here – a lot of M&A professionals. We don’t really need M&A advice.”

Jacobs left prep school during his year junior year, without a diploma, after being recruited by Bennington College in Vermont. He later transferred to Brown University in Rhode Island, and left without getting a degree.

Jacobs has faced obstacles while on the other side of the negotiating table – as a seller. In 2007, while leading United Rentals, Jacobs agreed to a $4 billion takeover by Cerberus Capital Management LP after shares dropped following earnings restatements for accounting errors. He stepped down as chairman shortly thereafter.

When the private-equity firm reneged on its bid due to what it said were weakening credit markets, United Rentals sued saying Cerberus was trying to extract a lower price. Delaware Chancery Court ruled against United Rentals, arguing that its executives should have known that Cerberus could pull out of the deal as long as it paid a $100 million breakup fee.

Jacobs’s investor fans include Marc Sulam, a former principal at hedge fund Healy Circle Capital. When he saw Jacobs plunk $150 million into XPO’s balance sheet three years ago, Sulam made his own initial investment in the company.

Personal Wealth
“Brad is somebody who, over the course of the past 20-plus years that I’ve known him, has created an inordinate amount of value,” said New York-based Sulam, who said XPO represents a “sizable” amount of his personal wealth. Jacobs’s stake in XPO, including about 20 million shares and warrants held by him and his wife, is valued at about $500 million. With 500 acquisitions and counting, Jacobs is far from stopping. XPO won’t be the last company he will build. “Definitely not!” he said, adding, in an understatement, “I like doing deals.”

http://www.bloomberg.com/news/articles/2014-07-29/xpo-s-jaco…

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Saul,
Do you have the adjusted earnings for XPO?

Thanks,
Andy

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Do you have the adjusted earnings for XPO?

Hi Andy, None yet, but 4th quarter earnings aren’t out yet. Adjusted EBITDA for the previous six sequential quarters are (in millions):

-12.4
-7.1
0.3
0.7
14.1
24.2

And for the December quarter they pre-announced 39.0 to 42.0 million!!! That progress, to reiterate, isn’t successive years, it’s successive QUARTERS!

Saul

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That is impressive Saul.

Thanks,
Andy