2 Transportation Plays That Should Yield Far Larger Returns Than FedEx Following Earnings

Includes: CHRW, FDX, XPO
by: Brian Nichols


Investors were too forgiving of FedEx's earnings, accepting weather as the only problem.

CHRW and XPO remain far better stocks than FDX.

Although small today, XPO Logistics's transformation into a household name will yield large returns.

Is FedEx A Post-Earnings Opportunity, Or Are There Better Opportunities Elsewhere?

FedEx (NYSE:FDX) reported earnings on Wednesday that can only be described as mediocre. The company missed on the top and bottom line, and like so many other companies, blamed its weakness on the weather. While weather difficulties is an applicable excuse for a transport giant, what investors should really ask is if FedEx is the best investment opportunity in this space?

FedEx has bigger problems than Mother Nature

Despite FedEx's missed quarter, it didn't trade with considerable losses. In fact, even after the fed announcement caused the market to tank, FedEx remained in positive territory. As an investor, this seems a little too forgiving of a company that's missed analyst targets in four of the last six quarters, according to FactSet data.

While FedEx remains a bellwether for economic performance, its fundamental struggles have more to do with consumer preference, much more than shipping volume. For example, ground volume increased 8% year-over-year while express saw no growth. This is a big problem for FedEx as Express would drive significantly higher revenue. Also, despite no growth Express's operating income increased 14%, which further shows why this segment needs to grow.

Nonetheless, many will invest in FedEx because it's a large, safe, and stable transportation company that people assume will always grow. The problem is that investors must pay 26 times earnings, which is far higher than the 19 times multiple of the S&P 500. As a result, this leads me to believe that there must be better options in the space.

A large and better option

Third-party logistics is becoming a hot commodity in the transport sector, a segment that's growing at 2-3 times the sector and GDP. Such businesses act as a middle man, finding customers the best deals, quickest routes, etc., by utilizing a large network, which is why it's growing in popularity. C.H. Robinson Worldwide (NASDAQ:CHRW) is the largest of such companies with a market cap of $7.5 billion, annual revenue of $12.75 billion, and a 6% growth rate.

C.H. Robinson is a great company, and in a recent Seeking Alpha article ValueArtifex explains one of the reasons why I believe the upside is so high for C.H. Robinson: It has a strong presence in the low-cost intermodal transportation space. This is a segment that is outpacing transportation as a whole on an annualized basis, one that many believe will become a staple in the sector as fuel costs and on-road carrying limits are implemented.

With that said, C.H. Robinson is not only growing twice as fast as FedEx, but is cheaper at 19 times earnings, and has a higher yield at 2.77% versus 0.43% for FedEx. Clearly, C.H. Robinson looks like the superior option.

The best available option

Looking at the space in its entirety, from top to bottom including big and small, the best opportunity in the sector lies in an ambitious small yet fast-growing third-party logistics company called XPO Logistics (NYSEMKT:XPO).

Here's a company that had $177 million in revenue during 2011, grew 152% last year to $702 million in revenue, and is now operating with a revenue run-rate of $2 billion. Look throughout the market and you'll find that no other company matches this rate of fundamental growth, which has been created via an aggressive acquisition and cold-start strategy headed by Bradley Jacobs, who has successfully made XPO Logistics his fifth billion dollar company of his career.

With that said, I explained with C.H. Robinson several reasons that I like the third-party logistics space, but another is that it's a highly fragmented industry, prime for making acquisitions. Last year, XPO acquired six companies, including Pacer, which like C.H. Robinson, gives the company a large and distinguished presence in the intermodal rail transportation system.

XPO Logistics's acquisition and cold-start spree is expected to continue over the next few years, and already in less than three years, Bradley Jacobs has grown this company from a small firm to the fourth largest freight brokerage company in the country. So far, Jacobs has hit on all of his ambitious goals, and during the last quarter, XPO boosted its long-term (2017) revenue and EBITDA guidance to $7.5 billion and $425 million respectively.

Given the company's current $1.5 billion market capitalization, investors can only assume that over the next few years, gains will be plentiful for this growth company, significantly adding to its one-year 80% return.

Final Thoughts

While I believe that C.H. Robinson and XPO Logistics are great and top investments in this sector, XPO Logistics has value and upside you don't hardly if ever find in the market.

Already, $7.5 billion in revenue is the goal, and its EBITDA guidance should translate to net income around $250 million. With that said, you can't use C.H. Robinson's trading multiples of 0.6 times sales and 19 times earnings as a way to predict XPO Logistics's eventual stock price. In this market, growth is awarded with a premium, and with 100% growth, XPO Logistics's premium will likely be excessive as it relates to C.H. Robinson.

In fact, XPO Logistics could very well maintain its price/sales ratio of 2.1, giving it a market cap of $15 billion at its peak, 60 times earnings, once its $7.5 billion in revenue is realized. With the current shares outstanding, it would translate to a price over $300, or gains of more than 1,000%. But, even if you play it conservative and slap a one times sales multiple then we're still talking about a $150 stock at 30 times earnings, which is close to FedEx's current multiple. If management dilutes shares by 20% over the next couple years, XPO still trades over $100.

Any way you look at it, XPO Logistics has exceptional upside potential, and won't be too long before it's a household name on The Street. This is likely the best investment in the sector, not FedEx.

Disclosure: I am long XPO. 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.

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