It appears that hell hath no fury than Amit Mehrotra scorned.
Mehrotra, Deutsche Bank’s (NYSE: DB) lead transport analyst, said in a Tuesday note that XPO Logistics Inc. (NYSE: XPO) prevented him from asking questions on its analyst call earlier that day because he has been critical of the performance of its North American LTL unit. Mehrotra (pictured) called XPO’s decision “unfortunate given our belief that companies that take fair, albeit tough, questions end up in the right place over time.” Companies that don’t, he said, can find themselves behind the eight-ball with analysts and investors.
In a phone interview following the note’s publication, Mehrotra said he is convinced the exclusion was deliberate. His belief stems from being around the block for two decades, and gauging a company’s motives through innumerable interactions with its executives.
XPO denied Mehrotra’s claims, saying many analysts, including those typically not called upon, want to participate in XPO’s quarterly calls. It is problematic to include everyone within the limits of a one-hour call, the company said.
Mehrotra has been critical of XPO on several occasions. However, what may have triggered this latest set-to was a January note in which he cited the 17th annual study of LTL shippers by Mastio Research. The most recent study, which canvassed nearly 1,500 customers and was published last November, found that 46% of respondents would recommend XPO while 21% would not. In 2015, when XPO entered the LTL business by buying Con-way Inc., 70% of shippers said they would likely recommend XPO while only 5% said they would not, Mehrotra wrote, citing the Mastio data.
“What’s clear to us from this data is that XPO has seen (a) significant deterioration in trends” since it acquired Con-way, Mehrotra wrote.
Following the acquisition, XPO spent the next couple of years culling marginally profitable or unprofitable freight. XPO lost tonnage and revenue but wanted to maintain a high return on invested capital, Mehrotra said. To do that, it underinvested in equipment and infrastructure, moves that didn’t sit well with sophisticated LTL shippers, Mehrotra said.
During that time, XPO’s rivals expanded their footprints and service capabilities to offer shippers superior value propositions, he said. Shippers willing to pay a premium for high-quality service responded in kind, he said.
Cutting its way to higher margins while failing to sustain profitable growth has put the LTL business at a disadvantage, Mehrotra said. The unit’s daily tonnage is down 8% since 2015, whereas the volumes of Old Dominion’ Freight Line Inc. (NASDAQ: ODFL) and Saia Inc. (NASDAQ: SAIA), considered by many to be the two leading operators, are up about 25% over that period. XPO’s LTL revenue has risen only 17% since 2015, while Old Dominion’s and Saia’s revenues have increased 80%, he said.
Mehrotra has been known to get aggressive and confrontational on analyst calls, as he has done at times on XPO calls. His goal, he said, is not to anger or embarrass a company, but to guide his clients toward optimal investment outcomes by forcing top executives to respond to difficult questions. Mehrotra rarely, if ever, has been denied an opportunity to query companies.
This is the second time in less than two weeks that Mehrotra has complained about being silenced on analyst calls. He said in an April 28 note that tanker carrier Scorpio Tankers Inc. had prevented him from querying management on calls, the third straight time it has happened. Mehrotra has a sell recommendation on the Monaco-based company (NYSE: STNG).
Strong Q1 results
Mehrotra’s comments came as the Greenwich, Connecticut-based XPO basked in the glow of first-quarter results that exceeded analysts’ estimates across the board and that led to a slew of positive comments and share price upgrades. XPO reported $1.25 per share in adjusted diluted earnings, well above the 93- to 94-cents-a-share median estimates from various sites. Adjusted earnings before interest, taxes, depreciation and amortization, a measure favored by XPO, rose to $321 million from $279 million. Operating income nearly quintupled to $625 million. Revenue rose to a record $3.47 billion from $2.99 billion, XPO said. The company raised its full-year adjusted EBITDA outlook to between $1.35 and $1.39 a share from $1.36 to $1.40 a share. The revised estimates don’t include $60 million in projected nine-month EBITDA from its intermodal business, which was sold at the end of March to STG Logistics for $710 million in cash.
The truck brokerage business, which has been firing on all cylinders for months, posted a 38% increase in revenue on a 23% increase in loads. Net revenue, which is revenue minus the cost of transportation and services, increased 21% to $134 million. The LTL unit generated $1.1 billion in revenue, up from $862 million in the 2021 quarter. Operating income fell $13 million to $132 million, while the unit’s operating ratio, defined as the ratio of revenues versus expenses, came in at 85.7%, an unfavorable 140 basis point year-over-year increase but better than the 200-basis-point increase originally projected. The company’s elevated use of expensive purchased transportation remained a problem, though executives expect the cost headwinds to abate through the rest of the year due to more favorable contractual terms.
Mehrotra, who has remained an XPO bull, said he is keeping his 12-month price target of $120 a share, though fears of a recession make that number subject to change. Shares closed Tuesday at $53.08, up slightly more than 4%.
Mehrotra said in the interview that the LTL unit’s issues are fixable. A five-point program outlined in January, which includes a 6% increase in the number of dock doors by the end of 2023, improving network flow with “targeted initiatives,” increased trailer count and doubling the number of driver graduates, are steps in the right direction, he said.
However, XPO has a multiyear service hole to dig out of, and it faces formidable competitors not waiting around for that to happen, he said. For example, Old Dominion and Saia will add as many doors by the end of this year as XPO adds in two years, Mehrotra said in the interview.
XPO, which until last summer’s spinoff of its logistics business to form GXO Logistics Inc. (NYSE: GXO) was treated by investors as a conglomerate of sorts, has long been valued at a discount relative to pure-play LTL companies like Old Dominion and Saia. To achieve LTL pure-play status, XPO will spin off its brokerage services segment later this year, and will sell or list its international operations at some point. However, its shares won’t trade at meaningfully higher multiples until the LTL business demonstrates the ability to build profitable volume growth and sustain strong service levels, Mehrotra said.
XPO shares, which traded at near $90 a share in mid-August, had fallen to just above $50 a share before Tuesday’s bump. The decline, according to Mehrotra, reflects the market’s ability to efficiently price in the challenges facing the company’s LTL operations.
