Cc: Stewart Oldfield
"
So the stock is currently at 10x multiple. Below a few paragraphs from
recent research pieces:
June 28 -> XPO buying opportunity - We have fielded several questions from
Investors in recent days on weakness in XPO's shares. Indeed, XPO's shares
are down over 15% from recent highs achieved just two weeks ago. The
weakness undoubtedly is on the back of declines across the broader
transports/industrials tape (XLI down 7% over the same period), reflecting
broader economic concerns around durable goods orders, trade wars and
flattening yield curve, as well as likely profit-taking after significant
outperformance over the last 12 months. Despite these valid factors, we view
the recent weakness in XPO's shares as a rare buying opportunity, which
comes along once in a while and is usually followed by significant
outperformance. To be sure XPO's LTL business is indeed cyclical, though
less so given company-specific profit improvement drivers, as evidenced by a
doubling of operating profit from 2015 to 2017 (EBIT +$220M) on relatively
flat revenue growth (+$66M). Meanwhile, XPO's other businesses (which
account for the vast majority of revenue and the majority of EBITDA) are
firing on all cylinders. For example, the company announced yesterday that
it will add augmented reality technology to its Last Mile business, which
will allow customers to use smartphones to see how certain appliances will
look in their homes before purchasing (thus reducing costly returns as well
as improve efficiency). This technology, as well as other initiatives, are
likely to continue allowing XPO to dominate the Last Mile market, as well as
capture significant share of growth in Contact Logistics - both businesses
that together account for half the company's sales. From a stock standpoint,
applying next year's FCF to current year FCF yield (4.4%) translates to a
share price of $132, or 34% upside vs. current levels, with likely
significant upside beyond this on the back of M&A and FCF growth beyond
2019. Maintain Buy/Top Pick.
June 19 -> XPO contract — XPO announced yesterday that it is constructing a
638K state-of-the-art distribution center alongside transnational food and
beverage company Nestle. As part of the strategic partnership, XPO will
manage the distribution of Nestle's consumer packaged goods and bring
efficiencies to its supply chain. The facility will also serve as a testing
ground for XPO's newest automation and warehouse technologies, which it is
co-developing with Swisslog Logistics Automation. The UK distribution center
is expected to be operational by 2020. Overall, we believe business wins
similar to this deal should continue to fuel organic growth for XPO as its
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business model evolves from half cyclical/half secular to entirely secular.
May 4 -> XPO results — XPO's 1Q results were solid, but what stood out to us
was potential for strong organic growth trends to be sustained, if not
accelerate, as XPO's business model evolves from half cyclical/half secular
to entirely secular. XPO Direct, for example, has potential to be a
significant driver of incremental growth over time, in our view, as the
company leverages its investments in technology and footprint to offer
solutions for omni-channel retailers (at little incremental cost). Growth in
this e-commerce centric business should become a feeder to XPO's LTL and
brokerage businesses, which could mute cyclicality and allow XPO to further
penetrate the robust e-commerce market. Perhaps most attractive, these
growth opportunities come with little incremental cost or capital, allowing
higher revenue to translate to much higher free cash flow. Based on these
observations we have increased our 2019 FCF estimate to $843M (from $800M),
with plenty of add'l growth opportunity in 2020 and beyond. As such we see a
relatively clear path to our $133 price target, which is based on an
unchanged 4.5% fcf yield. Maintain Buy/Top Pick.
{cid:
[email protected]}
Martin Zeman
Director I Key Client Partners
Deutsche Bank Wealth Management
DB Securities Inc
345 Park Avenue, 10154-0004 New York, NY, USA
Tel.
Mobi
Emai
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