By Brian Nichols / www.supplychain247.com / October 27th, 2016
FedEx has thrived behind the growth in e-commerce, but the problem for FDX stock is that XPO Logistics is quickly becoming a big name in the e-commerce space.
That is because XPO Logistics has gone from a company with $150 million in revenue (2011) to a juggernaut with more than $15.5 billion in expected revenue next year.
While most FedEx Corp (NYSE:FDX) investors think that Amazon.com‘s shipping initiatives are the biggest risk to FDX stock, they should be worried about XPO Logistics.
XPO Logistics and FedEx are two very different businesses, but at the epicenter of their operations is still logistics. FedEx does end-to-end shipping solutions for both businesses and consumers, whereas XPO Logistics is mainly focused on the former.
Furthermore, FedEx’s business requires heavy penetration with retail stores and ownership of planes, trucks, and fulfillment locations everywhere it operates. In other words, FedEx does end-to-end solutions in an industry that requires constant, large capital investments.
Meanwhile, XPO Logistics is the middle man. It is a brokerage that connects the shipper and the receiver. While FedEx has list prices for its services, XPO Logistics creates value by using its 88,000 employees to connect 50,000 customers to freight.
XPO has 19,000 company owned tractors; 47,000 trailers; and 9,000 53-foot intermodal boxes. Obviously, these owned assets come nowhere close to FedEx’s network. However, XPO has another million brokered trucks who bid to serve XPO’s massive network of customers. It’s this fact that makes XPO Logistics a long-term threat to FedEx Corp.
How XPO Logistics can cause FDX problems
Anytime that FedEx wants to add a new truck to its fleet, it must buy one. On the other hand, XPO Logistics just partners with mom-and-pop truck companies then incentives by giving them access to its network of growing customers. In other words, its FedEx vs everyone else, smaller trucking companies that can not otherwise compete with FDX.
The problem for all of these smaller trucking companies trying to compete against FedEx is pricing power. Small companies can not possibly compete with FedEx on pricing because the latter has so much scale. However, when XPO creates a network where trucking companies can pick and choose their spots, purchase freight cheap because of proximity or their current route, and that creates a pricing environment that not even FedEx can match over time.
Yes, FedEx is expected to create 4x more revenue than XPO Logistics next year, thereby implying it is a far larger business.
However, keep in mind that FedEx collects all revenue from freight, whereas XPO Logistics is a broker that earns a small commission.
Therefore, XPO Logistics’s revenue is not actually indicative of its size or scale. In other words, these two companies are far more alike than XPO stock or FDX stock owners realize.
With that said, FedEx has thrived behind the growth in e-commerce, but the problem for FDX stock is that XPO Logistics is quickly becoming a big name in the space.
According to XPO, just about all of the 30 largest big box retailers and e-tailers are XPO customers, with retail, e-commerce, and big ticket items driving its growth in the high margin Last Mile business.
During the first six months of this year, XPO closed $52 million in new Last Mile business, and it has $230 million more in the pipeline. These are all areas that FedEx has performed well in.
Beyond that, XPO Logistics’s relationship with Amazon.com has grown over the last 12 months. While Amazon.com never discloses customer data, a source tells BNL Finance that Amazon.com has grown from a top 25 customer last year to XPO Logistics’s number one customer today. When you consider XPO’s scale, a customer would have to do a lot of freight to be number one, a fact that should concern AMZN stock owners.
XPO Logistics, Inc. (NYSE: XPO) will hold its third quarter conference call and webcast on Thursday, November 3, 2016, at 8:30 a.m. Eastern Time. The company's results will be released after market close on November 2 and made available on www.xpo.com.
Call toll-free from US/Canada: 1-877-269-7756
International callers: +1-201-689-7817
Live webcast online at: www.xpo.com/investors
A replay of the conference will be available until December 3, 2016, by calling toll-free (from US/Canada) 1-877-660-6853; international callers dial +1-201-612-7415. Use the passcode 13646916. Additionally, the call will be archived on www.xpo.com/investors.
The takeaway for XPO stock
The bottom line is that XPO is growing and has a systematic advantage over FedEx to offer customers the lowest possible rates, because it has so much freight. While XPO Logistics is seen as no risk to FDX stock owners, it should be. Fact is its $4 billion valuation is misleading, and we believe that very soon XPO stock will trade at levels that are a better reflection of its overall business.
So while XPO stock is nearly 100% higher than its 52-week low at $34, it is still way off its all-time high over $50, and nowhere near what it is worth. This is a company that has been criticized for its lack of profit during its growth era. Many wondered whether XPO would ever be profitable and if it could payback debt. However, XPO Logistics created $50 million in net income during its last quarter to prove its earnings power, and three-quarters of its debt won’t mature for another five years.
As a result, there is no reason for XPO stock to trade at 2.5 times FY2018 EBITDA, not when competitor C.H. Robinson Worldwide (NYSE:CHRW) trades at a 10x multiple. XPO stock is worth at minimum 5x FY2018 EBITDA, a 100% premium, and we believe that upside will be realized as XPO Logistics’s valuation grows to reflect its size, earnings power, and the long-term threat it presents for FedEx and FDX stock.
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