Over the last year I have made no secret of my support for XPO Logistics (XPO), or that in January I took a bullish bet when I nearly doubled my position, making it the largest holding in my portfolio (up until last month). In the last month XPO has fallen nearly 30% without any breaking news or key developments or reasons to validate such a violent loss in market share. To some degree the stock follows the transportation sector, more specifically the trucking space, therefore weakness in shares of FedEx (FDX) and the United Parcel Service (UPS) could provide some explanation, although I doubt it.
My reasons for buying and owning XPO has always been very simple: Bradley Jacobs. My reason is the same reason that XPO is a favorite of analysts and has increased by more than 50% since June of last year. Bradley Jacobs basically bought the company, took over the board, and became the company's CEO with his $150 million equity investment in June of 2011. His plan is simple, which is to grow XPO into a multi-billion dollar company through a series of acquisitions and cold starts.
But to many, his "plan" may sound crazy, however, investors give Jacobs the benefit of the doubt, because after all, this would be the fifth time that Jacobs has built a multi-billion dollar company, and with XPO he's attempting it in a much larger industry than with his previous ventures. And with XPO he's starting with an established company, versus his other ventures where he started from scratch and then achieved billion dollar status within five years.
The bottom line is that if I were to buy a company and tell everyone that it would be worth billions of dollars in a few short years, they would probably laugh me out of the room, but when Bradley Jacobs makes the same claim we take his word because of his track record and the fact that we know he has the talent, knowledge, and has built a team that is fully capable of reaching the goal. However, he has made some seemingly impossible claims early in his role as the CEO/owner of XPO Logistics, and I think there are some who are no longer taking his word.
Jacobs planned that XPO Logistics will reach sales of $500 million in 2012. Obviously, the year is still young, but in its first quarter the company reported revenue of $44.56 million, but did announce one acquisition and reported aggressive growth from its cold start, along with opening two additional cold starts. Therefore, the company is on pace to record revenue between $225 and $240 million, which is far from its $500 million guidance.
XPO Logistics is scheduled to announce earnings on August 7 and I believe that combined with the weakness within the industry and a general expectation that the company is not acquiring fast enough to reach its $500 million goal that shares of XPO are being sold ahead of earnings. This is the only explanation for why the stock has fallen so close to earnings, and it could possibly get worse before getting better.
Back in February I had the privilege of speaking with Jacobs after the company's Q4 earnings report, and I asked him about acquisitions and he told me "We have a prioritized list, and there are 50-60 companies that are potentially actionable with billions in revenue, we are focusing on the best of these." This statement sounds encouraging, but what's discouraging is that it's almost August and we still don't have any acquisitions of this size, and back in June 2011 Jacobs told Reuters in an interview that he had already met with over 100 acquisition targets, and some were approaching revenue of $1 billion. But once again, we've heard the noise but are yet to see the action, besides one small acquisition last quarter.
As an XPO investor, I think we're now seeing a lack of confidence in the actions of our new CEO. It doesn't mean that we've given up hope, or that we don't believe XPO will become a billion dollar company, but perhaps investors believe that it may take a bit longer than previously expected. Therefore, investors are selling stock ahead of earnings, and believing that it will fall after posting a quarter with $55 million in revenue and no acquisitions, therefore making it even more difficult to reach the $500 million goal. As a result, investors may be expecting Jacobs to lower guidance, and although this is a possible scenario, there is also one other possibility.
Last quarter XPO did not announce its $3.4 million acquisition of Continental Freight Services until it announced Q1 results. Most companies announce acquisitions when they occur, however, XPO elected to wait, and announced with earnings. There is no particular reason that it waited, and honestly it's not a big deal. However, it's important because it could indicate how XPO will announce future acquisitions, and that maybe it has already acquired another company, or that it's in the process of a large acquisition and the company will update investors when it reports earnings. This may sound unlikely, but very possible, considering the company did not announce the Continental acquisition until its Q1 report. And since Jacobs is a bit methodical I imagine that all acquisitions will be announced with earnings from this point forward.
For those of you who currently own stock and are seeking answers to the recent price drop, and wondering what to do next, I believe there are three scenarios. The first is no acquisitions and lower guidance which pushes the stock significantly lower, around $10. The second is no acquisitions but guidance remains $500 million, resulting in little or no stock performance. And the last is an acquisition(s) and significant stock performance, possibly a 30% gain. I believe each scenario is equally possible, but if last quarter is any indication of what's to come, then we as investors should almost expect Jacobs to announce any and all acquisitions during quarterly results.
I will conclude with my forecast and say that cold starts are growing fast, and its acquisition of Continental should be well integrated into its IT platform and hiring should be near complete, therefore revenue growth should be robust, between $52 and $55 million for the quarter. The only question remaining should be acquisitions, and I believe the company will announce an acquisition.
If XPO announces an acquisition it may not be a billion dollar company, but I could easily see one to three acquisitions that will produce sizable revenue for the company. And if so, investors will be very sorry that they sold, because once acquisitions start they will not slow down, as Jacobs has a team in place and a system to integrate acquisitions and grow his network.
Therefore, with so many possibilities I'd say if you currently own shares then it may be wise to hold and see how it plays out, if you don't own shares then perhaps wait, but if you recently sold then you could be very sorry if the scenario of strong earnings and acquisitions occur and push the stock to new highs. The good news is that we'll all find out together, and we only have two more weeks, but until then, hold on tight, because it could be a bumpy road. But long-term, I see no reason of changing my own personal forecast of XPO becoming a future goldmine with market leading gains.
Disclosure: I am long XPO.
Additional disclosure: The material and opinions expressed in this article are for educational and informational uses only and should not be used to determine any investment decisions without due diligence or the consultation of a financial advisor.