EUR 850.00 For Business Accounts Only

Morningstar | Large Customer Loss and Foreign Exchange Hit XPO’s 1Q, but New Business Wins Remain Quite Strong

Global trucking and logistics provider XPO Logistics’ top line fell 1.7% year over year in the first quarter, due to the previously announced loss of truck brokerage and last-mile postal-injection business from a large customer. Foreign exchange and difficult comparisons also played a role. Organic growth, excluding the departed last-mile business, was near 2%. Organic growth came in below our forecast, likely because freight demand has moderated more than we were originally thinking, based on first-quarter commentary from providers across the freight brokerage and less-than-truckload shipping markets. Industry demand and pricing aren’t falling off a cliff, but truckers and logistics providers are emerging from an unusually robust backdrop (linked to the 2018 capacity crunch, which eased by year end) and there’s bound to be variability as conditions normalize. We estimate XPO’s adjusted EBITDA margin increased 40 basis points to 8.3%. The margin showing fell short of our expected run rate, but we expect improvement throughout the year as new business wins on-board and heavy IT-related investments increasingly layer in efficiency gains.

We tempered our top-line forecast for 2019, and to a lesser degree 2020, because of foreign exchange and because freight demand across the trucking and asset-light highway brokerage industries has moderated slightly more than we previously expected—most of XPO’s peers saw underlying shipment trends soften relative to previous quarters. The valuation impact was offset by the time value of money since our last update, so we don’t anticipate materially changing our $61 DCF-derived fair value estimate. Our midcycle top-line and EBITDA margin (9.5%-10%) assumptions remain intact. At $63, shares are trading in fairly valued territory relative to our long-term expectations for profitability and free cash flow growth. That said, this is a much more palatable valuation than earlier last year, when many logistics stocks were overvalued.

Management reiterated 2019 guidance, which in part calls for consolidated revenue growth of 3%-5%, which would assume the firm recovers a portion of the lost transportation-segment revenue. We are currently giving XPO the benefit of the doubt in our 2019-20 gross revenue forecasts, given continued solid new business wins over the past several quarters, some of which was said to be in the freight brokerage and last-mile divisions. Management still expects adjusted EBITDA of $1.650 billion to $1.725 billion, reflecting 6%-10% growth.