The XPO Logistics, Inc. (NYSE:XPO) worry warts can breathe easier today.
The transport and logistics titan posted third-quarter results that was a considerable improvement on various fronts over a difficult second quarter. Revenues of more than $4.22 billion beat Wall Street estimates by more than $300 million. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $439 million was $88 million ahead of estimates. Adjusted earnings per share of 83 cents more than doubled consensus estimates.
North American less-than-truckload (LTL) bounced back from a subpar second-quarter performance to post an all-time best quarterly operating ratio — the ratio of revenues to earnings — of 79.7%. The company’s logistics segment posted a 5% year-on-year revenue gain of $1.58 billion, while operating profits rose 25% as demand improved and low-margin businesses were shed. Even moribund industrial activity revived as automotive production perked up, which benefited XPO’s intermodal results.
The Greenwich, Connecticut-based company also guided fourth-quarter EBITDA estimates to between $400 million and $410 million, up from consensus of $386 million, a positive development considering that various European countries where XPO has exposure recently reimposed COVID-19-related lockdowns. The current lockdowns are not as widespread as in the spring when the novel coronavirus tore through Europe.
Analysts were further encouraged by XPO’s 2021 commentary, even though executives expressly declined to give quantitative guidance for next year. On its Friday morning analyst call, XPO Chairman and CEO Brad Jacobs said the company is “very comfortable with where we are” heading into 2021, adding there is a “meaningful recovery taking place” in the segments influencing XPO’s business.
For example, demand for supply chain management outsourcing continues apace, Jacobs said. Demand for heavy goods ordered online — a segment where XPO is the market leader — is expected to remain very strong through the peak season and beyond, he said.
In addition, the marketplace continues to embrace initiatives such as XPO Direct, where midsize businesses that share distribution center space in XPO’s facilities have turned over their fulfillment and distribution operations to the company, Jacobs said.
The uncertainties that exist today center on global macroeconomic trends that XPO has little control over, Jacobs said. The most notable is the still-raging coronavirus, the government measures to stem its spread, and the possibility that a vaccine may be approved in the next few months, with global distribution to commence sometime by midyear.
Analysts who may have erred on the side of conservatism were pleased with the company’s third-quarter rebound. Todd Fowler of KeyBanc Capital Markets said in a note Thursday night that “our sense is management has a renewed confidence around intermediate term objectives on the heels of improving underlying trends.” Fowler has a $110 price target on XPO shares, though he said Friday that the estimate is under review in the wake of the third-quarter results. Shares closed Friday at $96.40, down a little more than 2% on the session.
Jason Seidl of Cowen & Co., who has an outperform and top-pick rating on XPO with a $119-per-share price target, said the company experienced a “much-needed” rebound in North American LTL operations and remains “well positioned” to capture a good chunk of e-commerce business.
Amit Mehrotra of Deutsche Bank raised his target estimates to $115 a share from $85 based on a multiple of 10 times XPO’s $1.7 billion in EBITDA potential for 2021. Mehrotra said he could see raising his target to $137 a share by applying his current 2020 multiple of 11.2 times EBITDA, and also “give credit” for more than $600 million in 2021 free cash flow. XPO is expected to report about $500 million in free cash flow for 2020.
The higher target price could be achieved should “market participants increasingly appreciate (XPO’s) true earnings power in 2021,” he said.
The historically subpar second-quarter performance has been attributed to end-demand weakness during the pandemic-ravaged spring months, especially in North American LTL where higher costs combined with very subdued shipping activity. On the call, Jacobs disputed an analyst’s use of the word “stumble” to characterize the second-quarter results. The company focused less on the typical blocking-and-tackling that drives profitability and instead concentrated on keeping employees and customers safe and healthy during an unprecedented time, he said.
“We put profits to the side” in the quarter, Jacobs acknowledged.
Jacobs said LTL contract renewal rate increases are coming in at about 4.4%. He described current LTL pricing as rational and constructive.
