No one knows how long the magnanimity will last, but the cadre of analysts who cover XPO Logistics Inc. appears willing to give the transport giant the benefit of the doubt.
Concerned about narrowing margins at XPO’s (NYSE: XPO) all-important North American LTL segment following a subpar third-quarter print, analysts spent most of Wednesday morning parsing the company‘s fourth-quarter results and peppering executives to glean any clue on the segment’s direction. A small number of questions addressed XPO’s truck brokerage business, which continues to cook with gas, with revenue rising 36% year-on-year and loads per day increasing 22%. There was one question addressing XPO’s intermodal and drayage operation, which rarely gets mentioned in any discussions about the company. XPO’s last-mile delivery operation, a $1 billion annual business, never entered the conversation.
The analysts’ focus on LTL is understandable. The segment accounts for about two-thirds of XPO’s operating profits. It will also make or break Chairman and CEO Brad Jacobs’ quest to have the company mentioned in the same breath as LTL heavyweights like Old Dominion Freight Line Inc. (NASDAQ: ODFL), Saia Inc. (NASDAQ: SAIA) and the asset-based division of ArcBest Corp. (NASDAQ: ARCB), as well as well-run privately held carriers like Dayton Freight Lines Inc., Estes Express and Southeastern Freight Line. Without the cushion of a contract logistics business following last August’s spin-off of GXO Logistics Inc. (NYSE: GXO), XPO will more than ever have to stand on its own, and it will be LTL that will have to lead them.
By and large, analysts left the hourlong management call feeling satisfied with LTL’s trajectory. They embraced management’s pledge to dramatically improve the segment’s operating ratio, the essential measure of profitability because it establishes the ratio of revenue to expenses. Operating ratio rose 300 basis points in the third quarter and worsened in the fourth quarter to 87.5% as freight embargoes imposed in October and November in an effort to retrieve overdue trailers weighed on shipment and tonnage activity.
LTL operating ratio is expected to fall to 86.3% in the first quarter and drop to the low 80s in the second quarter as more traffic fills the trucks and operating efficiency efforts gain traction, the company said. For the year, XPO is guiding to an 83.3% operating ratio for the segment, which would be considered a positive outcome in light of its current performance.
To put the numbers in perspective, Old Dominion, considered the most efficient and productive LTL carrier, reported a fourth-quarter operating ratio of 73.4%, levels no one in the sector comes close to matching.
Analysts may have also been encouraged by the positive surprises that were embedded in XPO’s overall fourth-quarter performance. Adjusted earnings per share of $1.08 came in above the 97-to-99-cents-per-share range of analyst estimates. Adjusted earnings before interest, taxes, depreciation and amortization was reported at about $20 million higher than estimates. The company also guided its 2022 outlook to higher-than-expected levels, with adjusted EBITDA of $1.36 billion to $1.4 billion, up from $1.24 billion in 2021, and adjusted diluted EPS of $5 to $5.45 a share, well above the consensus forecast of $4.73 a share.
XPO’s share price rose 8.3% to $69.33 a share on Wednesday, its best one-day gain in 14 months and a welcome change for XPO bulls who’ve watched its share price drop from around $90 in August to the low $60s. Investors may also have been heartened by Jacobs’ pronouncement on the analyst call that he doesn’t plan to step down from XPO. In December, Jacobs sold about 20% of his XPO holdings in what the company described as a long-planned divestiture that was to be triggered at a specific point after the GXO spinoff. Jacobs still controls about 11% of XPO shares.
Several analysts upgraded their 12-month price targets for XPO stock in the wake of last quarter’s results and improved 2022 guidance. Jason H. Seidl of Cowen & Co. raised his target to $115 a share from $103, noting the remarkable strength in LTL pricing with carriers imposing 10% year-on-year increases in contract renewal rates. Another bullish sign, Seidl said, is that XPO hinted at implementing another general rate increase not long after pulling forward its scheduled January 2022 5.9% hike into November 2021.
Bascome Majors of Susquehanna Investment Group raised his target price to $124 a share from $107, saying XPO offers an extremely compelling valuation along with a “credible plan” to produce LTL volume and profit growth by midyear. XPO offers “one of the best risk/rewards” investments in the transport sector today, Majors said.
One analyst who didn’t follow suit was Amit Mehrotra of Deutsche Bank. The bank lowered its target to $120 a share from $131 a share based on what Mehrotra called a contracting market multiple on the shares. Mehrotra, who has emerged as XPO’s fiercest critic in the analyst community in part because of its refusal to move on non-LTL asset sales in order to focus exclusively on the LTL business, said he took away positive messages from the conference. XPO is “committed to improving the LTL business, and while progress may not be as fast as most want or expect, the trajectory is clearly in the right direction,” he said.
Mehrotra also highlighted Jacobs’ comments that there is a “rationale for divesting some of our lines of business” such as for debt reduction to accelerate the move to achieving investment-grade status. Company executives declined to comment on any specific measures being taken.
Still, Mehrotra remains very much in show-me mode. He took issue with executives for nearly doubling its 2022 capital expenditures for LTL when the company remains relatively loose on capacity and it handled 9,000 fewer shipments a day in 2021 than it did in 2012. Jacobs replied that investments like expanding trailer capacity during 2022, doubling the graduates of its driving school to 1,600 and adding 900 dock doors nationwide over the next one to two years are essential to growing the segment’s top-line revenue.
Despite the positive tenor of his post-call note, Mehrotra found a way to effectively damn with faint praise. The LTL business, he said, was “flawed, but fixable.” The “significant gap that exists between XPO and other non-unionized LTL companies should be viewed as an opportunity, adjusted for confidence in the management team to execute on that opportunity.”
The FREIGHTWAVES TOP 500 For-Hire Carriers list includes XPO (No. 8), Old Dominion (No. 9), Saia (No. 16), and ArcBest (No. 26).
