A few weeks ago I wrote a speculative article that covered the potential acquisitions of XPO Logistics (XPO). However, after dissecting the company’s earnings report and extensive research on the transportation and logistics industries I now see that my predictions and beliefs at that time were wrong. During the previous article I highlighted the previous ventures of XPO Logistics’ new CEO Bradley Jacobs, I considered the possible acquisitions that could take place in the immediate future, and I identified XPO Logistics as one of the best investments of the next five years. But like I said, I was wrong however, I was only wrong on how Jacobs would build a multi-billion dollar company out of XPO Logistics, a near $80 million company. Therefore after months of research into the previous ventures of Jacobs and the team that he has built around him I no longer believe XPO will be one of the best investments of the next five years, I now believe it will be the best investment of the next five years and that it will post unprecedented gains over the next five years.
When it was announced that Bradley Jacobs was investing $150 million in XPO Logistics and taking over as CEO I immediately purchased a small position in the company, 3% of my total portfolio. I had already known of his history and his ability to build multi-billion dollar companies. However the more I read on both him and the business model that he wished to create the more optimistic I became that XPO could become a once in a lifetime investment. Therefore I have since increased my position to more than 9% of my total portfolio, which is a larger position than I hold in fast growing mega-companies such as: Dollar Tree (DLTR), Caterpillar (CAT), McDonald’s (MCD), and Google (GOOG). In fact the only stock in which my position is larger is AT&T (T) which is a long-term stock that pays a hefty dividend with strong growth potential. And although some may think I’m crazy I would say that those people don’t understand the company’s potential and most likely return. Therefore let’s look at the positives, negatives, and facts surrounding this company, along with my opinions, and maybe you can decide for yourself what you think of this company.
As of late there have been a few developments that have discouraged investors, which mainly revolve around the company’s EPS during the last quarter. So let’s look at company’s earnings and the problematic areas that have resulted in a 23% loss over the last 9 days. I think we will see that investors only reacted to the bottom line earnings of the quarter and didn’t consider why the company posted a loss and if the high costs during the last quarter were necessary for the company to grow at the levels that CEO Bradley Jacobs is expecting. I believe that the earnings report should have created optimism that the company is moving quickly on its plan to build a multi-billion dollar company by putting the right pieces in place for unprecedented growth in the immediate future.
During the company’s last quarter it posted revenue gains of 7% year-over-year and an EPS of ($5.38), which was a result of accounting charges related to the $150 million equity investment and executive recruitment related fees. This quarter caused heavy selling pressure that resulted in a 23% loss over the last nine days. However, I don’t believe this is a sign of what’s to come, but rather the results of a new company that has made several expensive changes to experience rapid growth over the next several years.
Nearly all of the company’s loss was a result of a one-time accounting charge related to the $150 million equity investment and the differentiating stock price after the investment was complete. Jacobs made the investment under $9 share, post split, yet the stock traded north of $12 for most of the quarter, which resulted in a large cost that negatively affected the company’s income statement. In addition new executives that replaced previous executives account for the remainder of the charges that negatively impacted the company’s quarter. Therefore the charges that resulted in loss were one-time events that will not have an impact on future earnings. And now that these charges are behind the company it can now focus on the future and we can reflect on the progress that was made during Bradley Jacobs’ first quarter as CEO of XPO Logistics.
"We're going to start off buying some small and medium-size companies but over time the plan is certainly buy some larger companies as well," he told Reuters in an interview.
"I've been meeting with roughly 100 acquisition candidates over the last two months and they are of all sizes, I've looked at companies as little as $10 million to $20 million in revenue, and I've looked at companies approaching $1 billion in revenue."
Jacobs has a solid track record in founding small companies and building them, through acquisitions, into market leaders.
"I want this to be a multibillion-dollar company within several years," Jacobs told Reuters. "The industry is big, and I'm planning on creating a very big company."
When the news became public that Bradley Jacobs was investing $150 million and becoming the new CEO, its stock increased by nearly 100% within one month. The stock’s reaction was no surprise, because after all, the man built four multi-billion dollar companies from scratch. Jacobs has a history of starting a company and then building it into a large company in a short period of time, through acquisitions and cold starts. Therefore the initial reaction of the stock seemed reasonable and the future seemed promising, with the company already established and operating in one of the world’s largest industries.
Some investors have expressed concern and are growing impatient since the company is yet to make an acquisition, which is a large aspect of the company’s future growth. When the announcement was made public that Jacobs was to become the new CEO investors believed that acquisitions would begin immediately. Because soon after, Jacobs took part in several interviews stating that he’d already met with more than 100 potential acquisitions, and reiterated his plans to build a multi-billion dollar company through a series of acquisitions. Yet here we are three months later and no acquisitions have taken place along with earnings declining therefore investors are left wandering if Jacobs is out of his league or that maybe XPO is not billion dollar material.
I am personally impressed with the progress of XPO Logistics during the last quarter, and although there have been no acquisitions the company is making the right moves for long-term sustainable growth. Before acquisitions can be completed you must have the right infrastructure and executive team to manage and purchase new companies. And Bradley Jacobs has hired several big name successful executives that have extensive experience in both acquisitions and the transportations industry.
- Scott Malat was hired as the senior vice president of strategic planning. Scott previously worked for Goldman Sachs (GS) where he was the senior equity analyst covering the air, rail, trucking, and shipping industries. Scott will work closely with Jacobs and will be responsible for advising on the company’s strategy and capital structure; analyzing potential acquisitions and growth opportunities; and investor relations. I believe this hire was a home run for Jacobs, because although Goldman Sachs has lost some of its shine it’s still considered the premier investing company that consists of the brightest minds within the industry. And since Malat’s focus is the transportation sector, investors can rest assure that he knows the ends and outs of potential acquisitions and that he is fully aware of what companies have the greatest potential. I believe that by Scott Malat coming to XPO it speaks volume of his opinions on the company, and that he believes in it so much that he left his job at Goldman Sachs. And considering that he’s a man that’s very familiar with the industry it should encourage investors that he will be of great service to XPO and its future growth.
- Richard Metzler & Thomas Connolly will share the title of senior vice president-acquisitions. Both Richard and Thomas have many years of experience working in the transportation industry. Richard worked for more than three decades at DHL along with other ventures as a consultant to logistic firms. Thomas Connolly was a managing partner at EVE Partners, which is one of the largest financial firms that specialize in the transport-logistics industry. Between the two, they have 1000’s of connections within the sector and are both highly regarded within the industry. I believe that both will be great for XPO and along with Scott Malat will find the best possible acquisitions.
- Greg Ritter was hired as the senior vice president of brokerage operations with the task of developing the company with cold starts throughout the country. Ritter is by far the most well-known of the new hires with extensive knowledge and experience within the industry. Ritter’s job will be to recruit managers for new locations along with aiding in acquisitions. Because of his success within the industry he should be capable of finding the best managers. Ritter spent 22 years at third-party logistics giant C.H. Robinson Worldwide (CHRW). And I believe that Ritter will be one of the most crucial pieces of the puzzle in finding great acquisitions that strategically grow the company with the highest level of success.
Bradley Jacobs has been busy over the last three months hiring a team of experienced executives within the industry. Some have been discouraged by the lack of acquisitions but in order to be successful you must have the team in place to find companies that will help grow XPO. Therefore, with a solid team in place I believe that investors can expect aggressive growth over the next 12 months. And although investors have different opinions regarding the potential success of XPO I am quite bullish, with an outlook that I believe is very possible.
To better understand the potential success of XPO you must understand the size of the market, the inner workings of a truck brokerage firm, and the market share of companies within the industry. The logistics market is more than $1 trillion annually including $350 billion of trucking with only $50 billion spent through transportation brokerage firms. Therefore at $5 billion revenue per year, my projection by 2015, the company would control 10% of the market and if Jacobs plans to acquire companies at the rate in which he did at United Rentals (URI) or United Waste then this market share shouldn’t be difficult. The truck brokerage market is very fragmented with 10,000 licensed transportation brokerage firms and only a dozen create $200 million in annual revenue or more. And the reason that the gap is so large between the small and large companies is because most small brokerage firms hit a ceiling fairly quickly, in revenue and profit, because it must fund the working capital needs of the company and it’s always one month behind in receiving payments. Therefore the company is unable to continue growing because in order to grow the company would have higher initial costs, which some smaller truck brokerage firms can’t afford. The good news about this situation is that XPO Logistics doesn’t have this problem, because it can afford to grow and spend the money that is needed to create additional revenue.
Transportation brokerage firms are middle men that supply the shipper with the supplier. A transportation brokerage firm is important because it allows the supplier to shop a large number of shippers to find the best price or most convenient method of transportation for the goods that it provides. However, the business model consists of the brokerage firm having to pay the truckers or shippers before getting paid from the supplier. Therefore as the company grows there is a gap between costs and profit, and although the brokerage firms are non-asset, they have low margins and make it difficult for smaller firms to continue growing because of cash flow issues, which was explained above. Therefore the industry consists of many companies that have reached this ceiling that simply can’t afford to grow even though the demand is rising, which will open the door for XPO Logistics with a business plan that involves buying these smaller brokerage companies and investing the money that is needed for it to grow.
The business model that Bradley Jacobs is implementing is nothing new, he has built four multibillion companies through acquisitions and cold starts. His most previous company United Rentals (URI) had 700 locations with 500 created through acquisitions and 250 through cold starts. And although I believe the industry is priced well for acquisitions I believe that investors should expect more cold starts over the next 6 months. Because cold starts require less start-up money and have little damage on the company’s balance sheet. But regardless of what growth strategy is used most often I believe that both acquisitions and cold starts will result in growth and success for XPO Logistics.
In my last article I was wrong about targeted acquisitions when I suggested several public companies. Because it makes no sense for XPO to purchase companies that are trading higher than earnings when it can purchase profitable companies that have reached a ceiling for a much cheaper price.
I am particularly optimistic about this company, and believe it’s the best investment of the next five years. Jacobs has a proven track record of creating companies with billions of annual revenue in a short period of time, and he’s done so on four different occasions in three industries. However this is the first time that he’s purchased an already established company that he’s attempting to grow larger. Jacobs’ strategic plan is a proven success and with an executive team around him that has years of experience within this industry I can’t see how XPO could not become his best company. The transportation sector is one of the largest sectors in the world and there are 1,000’s of potential acquisitions that are available to purchase. And since Jacobs was able to build such large companies in the hard waste industry and equipment rental industry, within a few short years, I see no reason why history can’t repeat itself in a much larger industry.
There are few barriers with many choices and I believe that $5 billion in annual revenue by 2015 is a modest expectation. I honestly believe it could be more with the team that’s in place, the number of potential acquisitions, the size of the industry, and its growing market share. The market share of transportation brokerage firms is expected to increase over the next five years and because of XPO Logistics' aggressive growth model I expect it to control a large portion of the industry. Therefore I am not concerned with its most recent earnings report or the fact that it spent a large sum of money on hiring a very seasoned executive team. The pieces have been put into place and investors will now see action, acquisitions, and higher revenue because history tells us that any company Jacobs operates will grow much larger. And in this case I believe that XPO will be his most successful company to date because it’s an established company in a large industry growing at 2-3x GDP, therefore I believe its current price range will soon be a distant memory and that its trend to $100 will occur sooner rather than later.
Disclaimer: As with any investment, due diligence is required. The opinions in this article are not intended to be used to make a particular investment or follow a particular strategy.