was rising Thursday after the company announced plans to split in two. CEO Bradley Jacobs thinks that will create even more value for shareholders. Based on peer valuations, it looks as if he has a point. And shares could rise further as investors start valuing the company as two stand-alone entities.
XPO (ticker: XPO) will create one company dedicated to outsourced warehousing—a business it calls contract logistics. The other company will be dedicated to truck brokerage and less-than-truckload shipping.
Less than truckload, or LTL, refers to trucks that aren’t always full and carry freight shorter distances.
Old Dominion Freight Line
(ODFL) is a large pure-play LTL stock.
XPO’s truck brokerage competes with the likes of
C.H. Robinson Worldwide
(CHRW). That business arranges shipping for smaller customers, aggregating loads and matching them with trucking fleets. Any brokerage business, essentially, matches buyers and sellers.
XPO’s contract logistics includes about 800 warehouses the company runs for customers. That business, according to Jacobs, is booming as e-commerce volumes explode. “There are secular tailwinds,” he said. Large customers are accelerating logistics outsourcing as e-commerce volumes explode. What’s more, factory automation is driving down the costs for players such as XPO. “You go to our warehouses, you see a lot of robots.”
XPO started looking at strategic alternatives back in January. “Our [valuation] multiple was too low,” Jacobs said in an interview. “You can’t fight the market. You have to accept it. The market valued a complex company less than a pure-play company.”
In the case of trucking, Old Dominion and CH Robinson trade for about 17 times and 15 times estimated 2021 Ebitda, short for earnings before interest, taxes, depreciation and amortization, respectively. XPO Logistics trades for about 9 times the comparable estimate.
In the case of contract logistics, peers such as
(DSDVY) and others trade for about 12 times estimated 2021 Ebitda.
Roughly two thirds of XPO sales and Ebitda are from trucking. The rest is from contract logistics. If both portions of the business traded like peers, XPO would be worth about $20 billion as an entity, deducting out debt, leaving the stock about $150 to $170 a share.
Wall Street sees value in valuation-multiple arbitrage. Citigroup analyst Christian Wetherbee called the valuation straight forward and sees upside for shares. He rates them Buy and has a $138 price target for the stock. Wells Fargo analyst Allison Poliniak-Cusic wrote that she views the move positively. She rates the stock Buy with a target price of $158.
XPO stock was up 6.2% to $116.89 near midday. The
was up about 0.3% and the
Dow Jones Industrial Average
was 0.6% higher.
Debt is one thing standing in the way of a higher multiple. Excluding leases, XPO has about $4.5 billion of net debt, about three times Ebitda earned over the past 12 months. Jacobs wants to bring that down. “We want both companies to be investment grade,” he said.
Investment-grade ratings might be another positive catalyst for the stock multiple. The split is expected to be completed by the second half of 2021.
Write to Al Root at [email protected]