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Morningstar | XPO Hits Speed Bump as Its Largest Customer In-Sources Last-Mile and Freight Brokerage Business

Global trucking and logistics provider XPO Logistics posted 5% organic top-line growth in the fourth quarter. Revenue came in shy of our forecast as the firm’s largest customer (undisclosed, but we speculate it’s Amazon) has chosen to in-source a large swath of the last-mile postal-injection and freight brokerage business it gives to XPO. We suspect the truck brokerage and intermodal operations didn’t see much of an impact in the quarter, but XPO’s last-mile segment did. The customer’s decision translates into nearly $600 million of annualized lost revenue for XPO, and that will hurt. Freight brokerage will see about two thirds of the hit, with last mile grappling with the rest. It appears the global contract logistics divisions are largely in the clear. On account of the lost business and a “more cautious” outlook for the European operations, management materially tempered its 2019 revenue and EBITDA guidance, which came in below both our own forecasts and street consensus. The revised outlook put significant selling pressure on the shares, which fell roughly 13% to $52 per share on Feb. 15.

After incorporating the anticipated revenue loss and associated margin impact into our DCF model, we expect to lower our $63 fair value estimate by around 5%. The shares are trading at roughly a 13% discount to our expected revised fair value, placing the stock in fairly valued territory on an uncertainty-adjusted basis. That said, this is a much more palatable valuation than earlier last year when many trucking and logistics stocks were overvalued. Overall, the departing revenue is a painful setback and we also note freight brokerage comparisons will be tough this year, but we still believe XPO has plentiful opportunities for growth in the years ahead. The highway brokerage landscape offers opportunities for share gains in a fragmented market, the last-mile heavy goods delivery niche is growing nicely, and XPO’s contract logistics pipeline looks to be healthy.

On another note, XPO initiated a large buyback program in the fourth quarter and into the first quarter of 2019. It repurchased nearly $1 billion worth of shares (about 13%) as of February 2019, and we expect more to come. In short, management feels buybacks will prove more shareholder-accretive than acquisitions near term. Recall XPO took an M&A hiatus beginning in 2016 to digest several large deals, but it went back on the hunt for new opportunities over the past year (though none were closed)—M&A activity will apparently remain on hold now. Given that the shares are trading at a discount to our fair value, we currently view buybacks as a positive.