Report Entitled "Trucking Ridiculous; End Of The Road"
Spruce Point believes that XPO Logistics, Inc. (NYSE: XPO or “the Company”) is a classic stock promotion orchestrated by a web of individuals with checkered pasts, including ties to convicted felons, and an individual that abetted a Ponzi-scheme. As a result, we see 40%-60% intermediate downside risk to $24.00-$36.00 per share, with up to 100% long-term downside risk as a result of a flawed business model, questionable governance, egregious financial representation, increased regulatory scrutiny, and a loss of confidence in management.
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An Ineffective Rollup Dependent On Financing For Survival
XPO has completed 17 acquisitions since CEO Brad Jacobs took control in 2011 and deployed $6.1 billion of capital. Yet by our calculations, the Company has generated $73m of cumulative adjusted free cash flow in an expansionary economic period. In our view, this is indicative of a failed business strategy yielding a paltry 1.2% return on invested capital. XPO is dependent on external capital, asset sales, and factoring receivables to operate and appears to be covering up a working capital crunch that can been seen by bank overdrafts. As credit conditions tighten, cost of capital increases, and XPO’s business practices come under greater scrutiny by government regulators, its share price could swiftly collapse in Enron-style fashion. US Senators are already investigating XPO’s labor and safety practices, but we believe they should also review our report
Select Management & Board Members Have Associations with Accounting Frauds or Ponzi Schemes
CEO Jacobs has surrounded himself with a web of associates from his United Waste Systems and United Rentals days, companies where two of his former partners were convicted of accounting fraud and sent to jail. One recent XPO Director was sanctioned by FINRA, undisclosed to investors, for employing one of Jacob’s former partners that was sent to prison. XPO’s Audit Committee Director omits from his bio that he played a role in distributing securities related to Marc Drier’s $700m Ponzi Scheme. In addition, XPO’s Director of Technical Accounting and Financial Reporting worked at KPMG and Xerox during a period both companies were charged by the SEC with fraud. These facts should give investors extreme caution
Myriad Accounting Gimmicks Materially Distort XPO Financial Condition
In our opinion, XPO has used a nearly identical playbook from United Rentals leading up to its SEC investigation, executive felony convictions, and share price collapse. We find concrete evidence to suggest dubious tax accounting, under-reporting of bad debts, phantom income through unaccountable M&A earn-out liabilities, and aggressive depreciation assumptions: all designed to portray glowing “Non-GAAP” results. Additionally, we provide evidence that its “organic revenue growth” cannot be relied upon, its free cash flow does not reflect its fragile financial condition, and numerous headwinds will pressure earnings.
Multiple Valuation Approaches Point To 40%-60% Downside Risk:
XPO has morphed from a traditional third-party logistics provider into an integrated provider of transportation and logistics services (capital intensive). As a result, we believe it should receive a lower multiple more in-line with larger integrated peers such as UPS and FDX Fedex, albeit at a valuation discount to reflect its low-quality earnings from all the issues we’ve identified. We believe XPO’s highly “adjusted” EPS estimates require $190 million in “modifications” to account for a combination of aggressive accounting, unsustainable pension gains, and poor labor and safety practices. Our estimate of normalized EPS, adjusting for dilution, is $1.76 (47% below consensus) per share and suggests a price target of $24.00 to $36.00.
Thank you very much for your continued interest in our investment research and happy holidays.
This research presentation expresses our research opinions. You should assume that as of the publication date of any presentation, report or letter, Spruce Point Capital Management LLC (possibly along with or through our members, partners, affiliates, employees, and/or consultants) along with our subscribers and clients has a short position in all stocks (and are long/short combinations of puts and calls on the stock) covered herein, including without limitation XPO Logistics Inc. (“XPO”), and therefore stand to realize significant gains in the event that the price of its stock declines. Following publication of any presentation, report or letter, we intend to continue transacting in the securities covered therein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. All expressions of opinion are subject to change without notice, and Spruce Point Capital Management does not undertake to update this report or any information contained herein. Spruce Point Capital Management, subscribers and/or consultants shall have no obligation to inform any investor or viewer of this report about their historical, current, and future trading activities.
This research presentation expresses our research opinions, which we have based upon interpretation of certain facts and observations, all of which are based upon publicly available information, and all of which are set out in this research presentation. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this report may include forward looking statements, expectations, pro forma analyses, estimates, and projections. You should assume these types of statements, expectations, pro forma analyses, estimates, and projections may turn out to be incorrect for reasons beyond Spruce Point Capital Management LLC’s control. This is not investment or accounting advice nor should it be construed as such. Use of Spruce Point Capital Management LLC’s research is at your own risk. You should do your own research and due diligence, with assistance from professional financial, legal and tax experts, before making any investment decision with respect to securities covered herein. All figures assumed to be in US Dollars, unless specified otherwise.
To the best of our ability and belief, as of the date hereof, all information contained herein is accurate and reliable and does not omit to state material facts necessary to make the statements herein not misleading, and all information has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer, or to any other person or entity that was breached by the transmission of information to Spruce Point Capital Management LLC. However, Spruce Point Capital Management LLC recognizes that there may be non-public information in the possession of XPO or other insiders of XPO that has not been publicly disclosed by XPO . Therefore, such information contained herein is presented “as is,” without warranty of any kind – whether express or implied. Spruce Point Capital Management LLC makes no other representations, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use.
This report’s estimated fundamental value only represents a best efforts estimate of the potential fundamental valuation of a specific security, and is not expressed as, or implied as, assessments of the quality of a security, a summary of past performance, or an actionable investment strategy for an investor. This is not an offer to sell or a solicitation of an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction. Spruce Point Capital Management LLC is not registered as an investment advisor, broker/dealer, or accounting firm.
Disclosure: I am/we are short XPO.