As investors we often base our investment decisions off what we can measure, as fundamentals are what determine the long-term trend of a stock. However, it's the immeasurable fundamentals that often create unrealized value in a great company. These are things that can not be measured with a dollar, a metric, or a ratio, but are crucial in determining the long-term performance of a company. The subject itself is very broad, but the easy way to determine if a company is strong in this area is if it invests for tomorrow, and not for today, and is not worried about the upcoming quarter, but is worried about the upcoming year.
Far too often we as investors lose sight of this important concept, and during a phone conversation with the CEO of XPO Logistics (NYSE:XPO) Bradley Jacobs and the Chief Strategy Officer Scott Malat, I saw the perfect opportunity to educate retail investors on what these things are, how to identify it, and how to play these immeasurable fundamentals.
To ensure that you are not lost, allow me to provide a little background information. XPO Logistics, formerly known as Express-1 Expedited Solutions, is a non-asset based truck brokerage company. In 2010, the company had earned revenue of $157.99 million, but the next year, in June, entrepreneur Bradley Jacobs announced his intention to invest $150 million into the company and grow it into a $5-$6 billion per year, in annual revenue, powerhouse. Today, the company has grown, but is nowhere near its potential, nor is it near its desired size. Take a look at a quote by Jacobs that was said earlier this week, which explains his outlook for growth and shows how far the company has come in just over one year.
"We are at a $500 million revenue run-rate which is almost triple the $177 million in 2011 but we're still very small. There is more than $50 billion of truck brokerage business, and we are less than 1% of that market."
Over the last two years I have followed the stock closely, and its rise from mediocrity. Today, the stock trades at more than $18 per share, which is significantly greater than its $6 stock price (pre-split) back before Jacobs' investment. Jacobs, who is the founder of several multi-billion dollar companies such as Hamilton Resources, Amerex Oil Associates, United Waste Systems, and United Rentals (NYSE:URI) is aiming to build his fifth billion dollar company with XPO Logistics. His methods of growth through acquisitions and cold starts have grown famous and his methodical approach to business has been highly effective; and these are immeasurable tools that you can not quantify or figure with any tool.
A Look at XPO Logistics & What They Do Different
How can you measure a business strategy, innovation, vision, employee satisfaction and working environment, or the impact of a company's identity? The answer is that you can not, especially the impact of a company's operational strategy. Speaking of which, my conversation with Jacobs earlier this week was intended to cover the company's fifth acquisition in the last 14 months, East Coast Air Charter. Jacobs and his team paid $9.25 million to acquire this profitable company, which adds revenue of $43 million. I asked Jacobs to explain the benefits of the company, and how it fits into his operational puzzle, he responded by saying:
"Like all of our acquisitions, East Coast Air Charter is scalable. By pushing it through our sales channel we are able to grow it fast."
You see the very essence of XPO Logistics' future success or failure relies on the company's ability to scale up these acquisitions, which all start with the company's newly improved sales channels. This can be tied back to the company's IT platform, which was the second order of business following Jacobs' tenure, behind only hiring a dream team of executive talent. Let's look at a little bit more of what Jacobs had to say about the new acquisition.
"East Coast Air Charter is strategically important to us because we were doing a lot of business with them for air charter and our customers wanted more air charted services. We were only able to offer a limited amount of air charter, and we really wanted to bring this in-house so we can cross sell it to all of the 59 offices. All of our 59 locations are adding expedited air charter to their list of services that they provide. We now provide just-in-time solutions both domestically and across the border into Mexico. The industries that we serve in air charter are auto, pharmaceuticals, and healthcare."
Here is an immeasurable fundamental metric that goes hand-in-hand with the company's strategy and Jacobs' vision. It's the ability to recognize what the customer wants, creating or buying it, and then having the platform in place to grow it even larger. You see the executive staff at XPO Logistics is very methodical and has a very precise plan to go about growing the business. Back when Jacobs first made his $150 million investment the company had just eight operational centers, 25 branch locations, and this included 4,000 customers. You may notice above that XPO now has 59 locations, more than double in just 14 months. Jacobs commented on the company's growth, its immediate growth, and future growth. Take a look at a couple comments from Jacobs during our conversation:
"Over the last 14 months we have been executing our strategy. We have 17 cold starts, 8 of them in brokerage, 8 in freight forwarding, 1 in expedite, and we've completed five acquisitions in addition to my original investment."
These cold starts are part of the "plan" and although they don't produce the immediate revenue of an acquisition, they do allow for a more complete network, and Jacobs' team has done a great job at finding the perfect spots throughout the U.S. to be more appealing to a larger customer base. Once again, this is something we can not measure, the ability to fit together this strategic puzzle of finding the best locations to integrate the IT platform that helps to fit it all together. Although Jacobs and his team have been extremely busy in 2012, they don't plan to slack off.
"We will do two or three acquisitions this year, add on another $250 million in revenue, and add another three or four cold starts."
Here is your first look at the guidance for the upcoming year, as you can see it remains balanced, sticking to the same methodical approach that has led to the company's early success. This approach involves using the system that is already in place, hiring top talent, and then acquiring companies that bring something new to the table that can be easily scaled up.
"We've targeted 12 cities where there is good talent for cold starts. For us it's all about the people."
Jacobs can sum up his strategy in this one sentence above, choosing locations based on talent. Jacobs places an incredible emphasis on the team around him. Over the last year, I have spoken with Jacobs or Scott Malat at least a half-dozen times, and each time I always hear a story about various employees. Jacobs not only judges the success of a location on the amount of current revenue, but also the mindset and happiness of his employees. This is a rare find, an employee driven CEO, which is much different from what we typically see on Wall Street.
I asked Jacobs about his 125 hires over a 90 day period that was cited back in October when we spoke, and whether or not it has increased, he said, "In December we hired 62, in January we hired 61 people, and we are comfortable with that pace. We are finding good and talented people." He added that the company has grown its headcount from 200 to more than 900 employees over the last 14 months."
The growth at XPO Logistics is incredible, and the reason for its explosive growth is both a combination or great leadership and the overall size and demand of this industry. XPO Logistics is still small; the company serves a very small percentage of its potential market and has a large number of possible acquisitions that are available to buy. A good way to think about the company's potential is to think of a biotechnology company with a $1 billion product that just launched and has achieved sales of just $50 million. In other words, there is a lot of upside potential, and Jacobs explains this fact below.
"There are three million small and medium sized business enterprises that we've targeted for freight. And right now we have just 7,500 of those businesses as customers, so we have a lot of runway in front of us."
"Most of the 10,000 businesses in our segment are private and don't report earnings. The public companies are growing at a multiple rate to GDP; brokerage growth is in high single digits for growth at or around $50 billion."
In a market where companies are operating with record amounts of cash on balance sheets, are operating with maximum efficiency, and are sacrificing employee happiness to meet bottom lines, it is refreshing to see a CEO and company that do the opposite. Consider the behavior of well-known CEOs in America: Bank of America (NYSE:BAC) has reported net income of more than $2.75 billion over the last year. Yet the company's CEO Brian Moynihan continues to execute his plan of laying off as many as 30,000 workers by 2015. Furthermore, the CEO also temporarily attempted to implement a $5 charge for checking account users, those with a debit card, and who had less than a certain balance with the bank. Ultimately, job cuts such as this combined with revenue creating activities will reflect well on the company's bottom line, as seen last year, but is not good for public policy or for those employed by the company. Once again, an operational based metric that we can not measure but that ultimately affects the health of the company long-term.
Bank of America is all but one example of a company creating a hostile environment to meet the needs of Wall Street and investors. Today there are way too many CEOs and executives who feel the pressure to give in to greedy shareholders and who fail to see the large picture. Goldman Sachs' (NYSE:GS) Lloyd Blankfein (who I consider one of the best) fought this pressure for most of 2012, but finally gave in during the fourth quarter when he announced a cut in the percentage of revenues paid to staffing level employees. Then, there are other ends of the spectrum, with companies such as Apple (NASDAQ:AAPL), a powerhouse sitting on enough cash to cure much of the debt problems in Greece, yet maintain a "depression-like" operational stance, almost refusing to spent its money.
The number of companies that invest in the future, and are not afraid to spend money now to return large payouts later are far and few between. These are companies that spend cash and hire large staffs such as XPO Logistics; companies with a detailed business plan for long-term performance. I urge investors to spend more time understanding the important metrics that can not be measured, companies that invest for tomorrow and not for today. These are the companies that sacrifice short-term performance, create true value in a stock, and will outperform the market over a course of many years.