We found a global transportation logistics company that embraces a vision of the future that is still largely beyond the horizon - and it's making a multi-billion dollar bet that its strategy will be a game-changer.
This newborn transportation giant seemed to come out of nowhere in the past couple of years - it went from $3 billion in revenues in 2014 to $15 billion in 2015 on the back of a blizzard of acquisitions like Con-way and on synergies between end-to-end supply chain pieces that it's racing to cobble together into a cohesive whole.
When 2016 started the company was still working to splash its name on the sides of the thousands of trucks it acquired and on the clothing of its employees - XPO Logistics (NYSE:XPO).
Morgan Stanley analyst Ravi Shanker calls XPO the "Tesla of freight transportation," although the company does not produce electric vehicles. Where the similarities lie with the two companies, though, is in their full-throated embrace of technology as the hammer and anvil to forge a business empire.
Bradley Jacobs, XPO's visionary chairman and CEO, said in the most recent earnings call: "I think ultimately technology will replace truck brokerage… I think most of the functions that are done by humans, by people in truck brokerage, will be automated."
XPO is piling big resources into technology. The company's current investor presentation uses bullet points to hail an IT staff of 1,000, development of contract logistics software, inventory management technology, a freight optimizer for pricing and loads, real-time customer management, online bidding, and rail optimizer tools.
Intelligent Trucks Are Growing Closer
Analysts tend to agree that disintermediation of traditional trucking business models is coming, from the intelligent trucks that will slash human labor requirements to the Big Data algorithms that will automatically map out the most efficient routes and logistics for freight.
Todd Fowler, transportation analyst at KeyBanc Capital Markets, said in a recent investor note that he sees large nimble operators like XPO as winners "given their ability to invest in technology relative to smaller peers, gain share as mobile and web-based applications are increasingly used to source freight, provide greater functionality to customers and carriers, and potentially acquire competitors if they reach sufficient scale."
In the meantime while the future is waiting to happen, though, XPO is counting on a couple of more immediate drivers: successful digestion of its acquisitions to drive down costs via back office efficiencies and elimination of duplicate labor, and cross-platform sales opportunities.
Betting the Fleet on Synergy
With its spending spree leaving XPO now the proud owner of an end-to-end portfolio that ranges from freight brokerage and logistics to intermodal and less than truckload shipping, XPO is betting a lot on inter-company synergies.
In what might prove to be an understatement, Jacobs said: "Cross-selling is a big, big focus for us."
Morgan Stanley's Shanker summed it up in a research report: "The main rationale for XPO's existence is to build an industry leading cross-asset transportation platform and all the benefits that comes with it."
The bellwether Dow Jones Transportation Average was up about 6% in 2016 as of April 21's close, while XPO shares were up 20% for the year so far - not bad for outperformance.
XPO is targeting adjusted EBITDA of $1.25 billion in 2016, a jump of over 200% over last year, with analyst revenue estimates of $17.8 billion.
What could go wrong? For starters, industry-wide load pricing so far in 2016 is flattish - a macro concern that XPO's brash strategy might have trouble overcoming if the weakness persists. Second, there is the integration risk that comes with growing so big so fast.
Finally, XPO's skyrocketing growth has come at the price of high balance sheet leverage - the company is levered at about 5x net debt/EBITDA.
On balance, though, XPO has so many things going for it. And such sound logic in its acquisition, synergy and technology theses - the potential rewards appear to outweigh the risks. Investors may want to consider climbing aboard for the ride.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.