EFTA01434658

Air Freight & Logistics XPO Logistics Deutsche Bank Markets Research Rating Buy North America United States Industrials Air Freight & Logistics Reuters XPO.N Bloomberg XPO US Exchange Ticker XPO NYS Company XPO Logistics Potential for 30%+ FCF growth in 2019 Valuation & Risks We are reiterating our Buy rating on XPO Logistics (XPO) as we see good potential for FCF growth to surpass 30% in 2019. This alert should be read in conjunction with our comprehensive industry report, released concurrently with this alert, and which includes our 2019 FCF walk for XPO. Making the case for 30%+ FCF growth in 2019 Our 2019 free cash forecast of $750M implies 20% yoy growth, with upside to 35% growth (to $835M) if current organic growth rates are sustainable- which we think is a realistic outcome given macro backdrop, e-commerce exposure, the company's growth investments, and mgmt's recent comments. From this standpoint we see a relatively quick trajectory to our $133 price target, which represents 40% add'l upside. See our FCF walk in our industry report. Ignore the chart; XPO shares are still cheap Our long-held positive stance on XPO has been predicted on accelerating revenue and free cash flow growth. Indeed, organic growth accelerated to +10.4% in 40, and free cash flow has tripled in two years- from $211M in 2016 to expected $625M this year. In the context of this free cash trajectory, an exact tripling of equity value in a little over a year is highly explainable, if not conservative, as it implies little in the way of multiple expansion (i.e. equity value has increased almost exactly in-line with free cash flow). This is also in the context of strong transportation industry fundamentals, with demand drivers (CASS, truck EFTA01434658 tonnage, U.S. IP) seemingly firing on all cylinders. Valuation and risks Today's forward FCF yield of 4.8% on 2019e FCF equates to equity value of $111 per share. Ultimately, we expect FCF yield to continue to contract (which would increase equity value), as investors increasingly prescribe a more reasonable multiple for XPO's secular growth prospects. Our sum of the parts analysis suggests a fair Ev/EBITDA multiple of 11.5-12x (vs. 9.5x today), which would imply a forward FCF yield of about 4%. Applying a 4% forward yield to our 2019 FCF estimate equates to $133 per share, which we think should be highly achievable over the next 12-18 months (and even higher under our above-mentioned upside FCF forecast). Risks to the downside include recession, weak integration of any potential new acquisition, and over-leveraging of the balance sheet. Amit Mehrotra Research Analyst Seldon Clarke, CFA Research Analyst Kenya Watson Research Associate Chris Snyder, CFA Research Associate Date 22 February 2018 Company Update Price at 21 Feb 2018 (USD) Price Target 52-week range 93.99 133.00 97.12 - 44.99 Deutsche Bank Securities Inc. Distributed on: 22/02/2018 21:04:22 GMT Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. 7T2se3r00t6kwoPa EFTA01434659 22 February 2018 Air Freight & Logistics XPO Logistics Appendix 1 Important Disclosures *Other information available upon request Disclosure checklist Company XPO Logistics Ticker XPO.N Recent price* 93.99 (USD) 21 Feb 2018 Disclosure 1, 7, 8, 14, 15 *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/ DisclosureDirectory.eqsr. Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States.See Important Disclosures Required by Non-US Regulators and Explanatory Notes. 1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees. 7 8 Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year. Deutsche Bank and/or its affiliate(s) expects to receive, or intends to seek, compensation for investment banking services from this company in the next three months. 14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year. 15. This company has been a client of Deutsche Bank Securities Inc. within the past year, during which time it received non-investment banking securities-related services. EFTA01434660 Important Disclosures Required by Non-U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States.See Important Disclosures Required by Non-US Regulators and Explanatory Notes. 1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees. 7 Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Amit Mehrotra Page 2 Deutsche Bank Securities Inc. EFTA01434661 22 February 2018 Air Freight & Logistics XPO Logistics Historical recommendations and target price. XPO Logistics (XPO.N) (as of 02/21/2018) 125.00 100.00 75.00 4 50.00 2 1 25.00 0.00 May '16 Sep '16 Jan '17 Date 1. 02/26/2016 Buy, Target Price Change USD 37,00 Robert Salmon, CFA** 2. 08/05/2016 Buy, Target Price Change USD 42,00 Robert Salmon, CFA** 3. 11/01/2016 Buy, Target Price Change USD 60,00 Amit Mehrotra 4. 03/02/2017 Buy, Target Price Change USD 75,00 Amit Mehrotra Equity Rating Key Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) we recommend that investors buy the stock. Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock. Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Newly issued research recommendations and target prices supersede previously published research. 5. 11/02/2017 Buy, Target Price Change USD 110,00 Amit Mehrotra 6. 01/17/2018 Buy, Target Price Change USD 125,00 Amit Mehrotra 7. 02/08/2018 Buy, Target Price Change USD 133,00 Amit Mehrotra May '17 Sep '17 Jan '18 3 5 Current Recommendations Buy Hold Sell 6 7 EFTA01434662 Not Rated Suspended Rating ** Analyst is no longer at Deutsche Bank Equity rating dispersion and banking relationships Deutsche Bank Securities Inc Page 3 Security price EFTA01434663 22 February 2018 Air Freight & Logistics XPO Logistics Additional Information The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). Though the information herein is believed to be reliable and has been obtained from public sources believed to be reliable, Deutsche Bank makes no representation as to its accuracy or completeness. 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Page 7 EFTA01434674 David Folkerts-Landau Group Chief Economist and Global Head of Research Raj Hindocha Global Chief Operating Officer Research Anthony Klarman Global Head of Debt Research Michael Spencer Head of APAC Research Global Head of Economics Paul Reynolds Head of EMEA Equity Research Andreas Neubauer Head of Research - Germany International Production Locations Deutsche Bank AG Deutsche Bank Place Level 16 Corner of Hunter & Phillip Streets Sydney, NSW 2000 Australia Tel: (61) 2 8258 1234 Deutsche Bank AG London 1 Great Winchester Street London EC2N 2EQ United Kingdom Tel: (44) 20 7545 8000 Deutsche Bank AG Mainzer Landstrasse 11-17 60329 Frankfurt am Main Germany Tel: (49) 69 910 00 Deutsche Bank Securities Inc. 60 Wall Street New York, NY 10005 United States of America Tel: (1) 212 250 2500 Deutsche Bank AG Filiale Hongkong International Commerce Centre, 1 Austin Road West,Kowloon, Hong Kong Tel: (852) 2203 8888 Deutsche Securities Inc. 2-11-1 Nagatacho Sanno Park Tower Chiyoda-ku, Tokyo 100-6171 Japan Tel: (81) 3 5156 6770 EFTA01434675 Dave Clark Head of APAC Equity Research Spyros Mesomeris Global Head of Quantitative and QIS Research Steve Pollard Head of Americas Research Global Head of Equity Research Pam Finelli Global Head of Equity Derivatives Research EFTA01434676