EUR 850.00 For Business Accounts Only

Morningstar | Tight Truckload Capacity a Solid 2Q Revenue Tailwind for XPO in the U.S. and Europe

Global transportation and logistics company XPO Logistics’ second-quarter top line grew a very healthy 11% year over year on an organic basis. Following the trend we’ve seen with most logistics names we cover, total gross revenue growth exceeded our expected run rate for the year thanks to robust core-pricing acceleration in the transportation segment (especially domestic truck brokerage and intermodal) linked to unusually tight truckload-market capacity. Logistics’ top line also outperformed on strong new business wins in recent quarters. Widespread adoption of electronic logging devices among asset-based truckers and limited driver availability, coupled with solid freight demand, are behind the trucking industry capacity constraints.

Relative to the same period last year, the consolidated gross revenue increase stems from impressive organic growth in freight brokerage (up 27%) and last mile (up 17%) in North America, and stronger dedicated-truckload demand in Europe. Truckload capacity is constrained in the United States, as well as in Europe, supporting a highly favorable rate environment across most services. Logistics' organic gross revenue rose 14% on new business and healthy demand for e-commerce-related contract logistics services in North America and Europe.

Our longer-term midcycle model assumptions remain largely intact, including our EBITDA margin forecast of 10.5%-11.0% in 2022. That said, we expect to boost our $64 fair value by 3%-5% as a result of raising our gross revenue growth forecasts for 2018 and 2019, as the robust intermodal and truck brokerage markets are showing few signs of slowing in the back half of 2018 (demand and pricing), and XPO's logistics sales pipeline remains full. That said, the shares continue to trade in overvalued territory, suggesting investor expectations may have swayed a bit too far to the optimistic side--a common theme across our third-party logistics coverage.

Excluding integration outlays, rebranding costs and foreign exchange hedging-related gains, XPO’s consolidated adjusted EBITDA margin expanded 10 basis points to 10%, not far off our expectations. XPO's overall profitability remains quite healthy, especially considering ongoing, heavy investment in IT infrastructure and sales capabilities. Management once again reiterated its $1.6 billion EBITDA target for 2018. We think this target remains comfortably within reach given the strong operating backdrop for the firm’s North American freight brokerage, LTL shipping, and last-mile businesses, along with an impressively deep pipeline of contract logistics opportunities (logistics' sales pipeline is up 41% relative to the same period last year).

We expect widespread adoption of electronic logging devices among small carriers, coupled with the driver shortage and healthy freight demand (favorable macroeconomic trends), to keep U.S. truckload capacity unusually tight throughout the remainder of 2018. This dynamic will continue to provide core-pricing tailwinds for XPO's North American LTL, intermodal, and truck brokerage (spot and contract rates) operations. The firm's heavy goods last-mile delivery division should see another solid year of growth as well, given favorable e-commerce trends in both the U.S. and Europe. We also look for additional profitability gains stemming from ongoing optimization initiatives and leverage from revenue growth.