On Thursday XPO Logistics' (XPO) decision to raise money made sense, as the company announced the acquisition of Turbo for $50 million. This acquisition creates an additional $124 million in revenue that can be scaled up to create an even larger company. But more importantly, with the acquisition, the company has reached its goal of acquiring $250 million in revenue during 2012, and is ahead of schedule on all other phases of growth.
Following the news of the acquisition I reached out to the company's CEO, Bradley Jacobs, an entrepreneur who founded such companies as United Waste Systems, Hamilton Resources, Amerex Oil Associates and United Rentals (URI) all of which became billion dollar companies. United Rentals is still strong today, with a market capitalization and sales of more than $3.5 billion, and a company that Jacobs, basically, founded at his kitchen table, much like all of his billion dollar projects.
Jacobs and I spoke for over 20 minutes about the acquisition, the company's growth plan, and the near-term direction of the company. As a result, I am providing a few of his key comments along with my analysis of his statements regarding the acquisition and the future outlook for the company. Below is his answer to my first question, which was, "What was attractive about Turbo?"
"One of the main things that attracted us to Turbo is that it's very scalable. They're located in areas that are ripe for recruiting large numbers of qualified people into our workforce. Turbo also comes with a very strong management team, which is important to our ability to grow the division. And they've been around for 28 years, with deep relationships in attractive end markets. We've been impressed by their strong bonds with customers and carriers."
"Our growth strategy has one common denominator across the three areas of cold-starts, acquisitions and existing operations - hiring! Our investments in recruitment and training programs are paying off. We've hired 125 additional sales people in the last 90 days and we're planning to ramp it up even more."
I feel it's important to point out that XPO Logistics had just 10,000 carriers before this acquisition and now has over 20,000. The addition of new carriers will boost the company's sales much faster. Also, back on August 8 when I spoke with Jacobs following Q2 earnings he told me that they had just 50 locations, which was still great progress over the previous year. Now, with 56 locations, and 125 new hires, the company has expanded rapidly in just three months, a strong indication of an earnings beat in two weeks. However, despite these obvious strengths, I asked Jacobs, "why the higher premium for Turbo compared to Kelron?"
"Earlier, we acquired Kelron at a price that reflected the fact it was a scalable turnaround. Turbo is also scalable, but different. It's a well-run, profitable operation that serves its customers like a well-oiled machine. Turbo's been around for 28 years, they're highly respected in the industry, and we were able to buy the business at a multiple of EBITDA that's within our budget. It's a home run."
The key word in his statement above is "profitable." Of the very few XPO bears that exist, some have expressed concern regarding its near $8 million loss during the previous two quarters. The company has increased its spending by a wide margin, which is mostly due to expansion and compensation for an executive team that is built to run a multi-billion dollar company, along with new hires.
Some have speculated that XPO Logistics has raised money, twice this year, because management does not see a clear path to profitability. I will be the first to say that I was frustrated with the latest round of financing. However Jacobs did say that part of his billion dollar plan was to raise money over a course of many years. The sexiness to his plan (which has always worked) is acquisitions, cold starts, and new hires, and although he invested $150 million of his own money into XPO, it still takes money to make money and financing is necessary to grow at this company's pace.
XPO Logistics as a company is an aggressive story where investors are placing their bets on the growth of third-party transportation logistics services. In a previous conversation with Jacobs, he explained the size of the industry and that he was attacking XPO similar to United Rentals, when he founded it.
Back when Jacobs started United Rentals, he was betting that equipment rentals could become a large industry, and he was right. Now, in the transportation sector, he is in a much larger industry, and although a different industry, he has succeeded time-after-time with this strategy. But with third-party logistics being a speculative industry, an investment in XPO Logistics is a belief that the transportation brokerage industry itself will grow at a rate that allows all of the acquisitions to grow as well.
Regardless of how you view the company's plan to raise money over a period of many years, the prospects of growth, or the aggression on behalf of management, there is one thing that no one can deny: XPO can become profitable whenever it desires with acquisitions such as Turbo. The key is that XPO is an aggressive growth company, and is not concerned with bottom line performance because of its large cash position. With that being said, I asked Jacobs, "besides doubling the number of carriers from 10,000 to over 20,000, increasing the size of the company by more than 50%, and Turbo being a well-established and profitable company, what separated Turbo from other potential acquisitions?" He responded by saying:
"Every acquisition is different and tells its own story. We look at hundreds and hundreds of companies, and we pick the ones that we feel have something special about them.
We look for companies that can be scaled up, that have good teams and strong leaders in the field, or bring something new to the table. Kelron brought us into Canada, Continental brought us into the Carolinas, and now Turbo brings us deeper into brokerage, with a strong position in temperature-controlled. They also have synergies with our expedite business."
In regards to "what" Turbo brings to the table, it gives the company a presence in temperature control and retail, along with top line growth. The temperature control segment is huge, and the entrance into retail may be even larger. This could be a domino effect acquisition that grows other segments of the business because of temperature control and the retail position. As a result, it seems logical that after three very important acquisitions, XPO would take time and grow its business before acquiring new companies. Therefore, I asked, "Now that you have met your revenue run rate with acquisitions ($250 million) can we expect more in the final months of 2012?"
"I think we could do another acquisition by the end of the year, or we may wait until the first quarter. There's no particular magic to year-end. Given our pipeline of acquisition prospects, and the dialogues we have going, I feel comfortable saying that we should close another acquisition sometime in the next four months."
There you have it, another acquisition in the next four months. In the last 12 months the company has reported revenue of $190.57 million, a gain of less than 10% over 2011. Moving forward into 2013, after $250 million in acquisitions, seven cold starts that continue to grow week after week, and an entrance into new segments, XPO is positioned to meet its 2013 goal of $500 million in sales. This would represent sales growth of more than 160% year-over-year, and in this economy how many companies are growing at this rate?
My final question to Jacobs was for him to explain the management team's impact on acquisitions and how he built his team to handle the explosive growth that XPO will see over the next year. And I also asked him about the company's progress in relation to his own expectations, and he responded by saying:
"The management team that I've put together was not structured to run a $500 million operation. We have a management team that can run a several-billion-dollar company, and the skill set to get us there. That's been our vision from the start. It was important to put the right people in place ahead of our growth, to execute on our plan."
"We're on track or ahead of schedule with every major component of our growth strategy: acquisitions, cold-starts and the optimization of our operations. This year, so far, we've opened 12 cold-starts, seven in brokerage, and completed three acquisitions. We established our national operations center in Charlotte, and we've made great strides in recruiting, training and IT - all this within one year of launching our strategy."
There aren't many growth stories such as XPO in this market. The acquisition is huge, the employment is enlightening, and this company is positioned to grow regardless of the economy. The company is scheduled to announce earnings on November 5 and I believe it will exceed expectations. We've already seen companies such as J.B. Hunt (JBHT) and United Parcel Service (UPS) impress the markets. Jacobs explained to me that the integration of Turbo has been ongoing for months therefore we should see immediate results.
The bottom line: In the last three months, and following this acquisition, XPO has doubled its carriers, hired 125 new employees, added six new locations, entered temperature control and retail, and purchased a well-established profitable business in Turbo. In terms of valuation, XPO is strikingly undervalued, trading at less than 0.50x next year's sales and is seeing growth that is unmatched in the transportation sector. As an investor I am anxious to see what happens next and I am happy to be aboard this plane, which has now taken off.
Disclosure: I am long XPO.