Two Different Ways to Pursue the Logistics Market

Two Different Ways to Pursue the Logistics Market

This article was written by Moe Chabot, a Financial Analyst at I Know First.

 

 

 

 

 

Summary:

  1. Solid Q2 Results for XPO Logistics and Old Dominion Freight Lines Inc.
  2. What’s the future like for both companies
  3. Current I Know First Forecast

XPO

(source: Wikimedia)

XPO Logistics is a global provider of supply chain solutions, with their main source of revenue coming from USA (about 60% of their income comes from the USA). While the rest comes from a diverse set of countries such as France, United Kingdom, and Spain(as shown in the graph to the right).XPO is broken up into two main parts, Transportation (63% of revenue),and Logistics (37% of revenue), in the Transportation segment the company provides multiple services such as the movement of raw materials, parts and finished goods. In the logistics segment, the company provides warehousing and distribution solutions, such as factory support, aftermarket support, integrated manufacturing, packaging, labelling, distribution and transportation.

(Source: XPO.com)

 

ODFL

(source: Wikimedia)

Old Dominion Freight Line is a motor carrier providing regional, inter-regional and national less-than truckload (LTL) services. The Company’s LTL services include ground and air expedited transportation for time-sensitive shipments, consumer household pickup and delivery and freight delivery services throughout North America. Some other services the company offers are container drayage, truckload brokerage, supply chain consulting and warehousing, however, most of their revenue comes from their LTL services (about 97% according to their 2018 annual report)

XPO and ODFL at the beginning of the year where neck and neck, however, XPO took the lead and hasn’t looked back since.

 

 XPO Logistics Q2

According to the Q2 earnings report, XPO Logistics recorded record highs for revenue, net income, adjusted EBITDA, cash flow from operations and free cash flow. Revenue grew 11% year over year, net income rose 178%, and EBITA rose grew 11%.

(Source: Yahoo Finance)

The increase in revenue is due to the growth of both sectors of the company, Transportation and Logistics.

Transportation– The companies transportation sector generated $2.89 billion in revenue a 14.5% increase in from the same period last year. The reason this segment grew so much comes down to two main factors, first of all, they saw an increase in their freight brokerage and last mile business in North America. Secondly, they saw an increase in dedicated truckload transportation in the UK and France.

Logistics–  The companies Logistics sector generated $1.51 billion for the quarter a 19.1% increase from the same period last year. This growth from the logistics sector is mostly due to the demand for e-commerce logistics, customer packaged goods, and the technology sectors in North America.

Look Ahead at XPO Logistics

In XPO’s Q2 statement they reaffirmed their target EBITA of $1.6 billion and expected cash flow of approximately $1 billion.

Technological Innovations

XPO Logistics currently invests over $450 million annually into their business this is one of the main ways they try and create a competitive advantage in  a very competitive field. They currently have over 1,700 technology professionals working with them to try and advance their company in different ways, one way they are advancing the company is that recently they deployed 5,000 collaborative warehouse robots to help with their logistics business. A few other innovations XPO did to improve their business was

  • Connect the digital freight marketplace, this allows shippers and carriers to see the demand by geography as well as automates load matching
  • XPO’s mobile app which helps their customers reduce empty miles
  • Voice integration with Amazon Echo as well as Google Home which enables customer self-service

M&A Expansion

In the past, XPO has done very well in M&A and looks to continue acquiring more companies. For example of some of their good acquisitions in October 2015 they acquired Con-way and released approximately $200 million in cost improvements as well as they doubled adjusted operating income from FY 2015 to TTM June 30, 2018. Another acquisition they made was they acquired Norbert Dentressangle in June 2015, from this acquisition they improved margins by cross-fertilizing best practices and addressing loss makers, also once they made the acquisition they saw record revenue and profit in both the transportation and logistics sector. Looking towards the future XPO is exploring potential M&A opportunities primary focused on North America and Europe in order to improve existing or complementary lines of business.

 

Old Dominion Freight Line Q2

In the second quarter, Old Dominion Freight revenue grew 23% to $1.3 billion, they also saw earnings per diluted share grow 67.2% to $1.99, net income also grew 66.1% to $163 million. Total revenue and net income for Old Dominion have grown every year for 20 years except for two years in 2009 and 2016, this is just one example of how stable their overall business is.

(Source: odfl.com)

Their revenue growth for the quarter is mostly due to a 14.6% increase in LTL tons and an increase of 7.4% in LTL revenue per hundredweight, this shows that Old Dominion is continuing to focus on yield-improvement initiatives that increase individual account profitability. The increase in LTL tons includes an increase in LTL shipments and LTL weight per shipment of 11.2% and 3.1%.

Look Ahead at Old Dominion Freight Line

Old Dominion Freight Line is currently looking at a significant market opportunity because from 2002 till 2017 the top 25 LTL carriers grew from $19.4 billion to $37 billion, and ODFL only makes up 9.1% and is looking to slowly increase their share of the market.

(Source: odfl.com)

Looking forward Old Dominion is looking to increase their market share by superior customer service delivered at a fair price. One example of this is that there on time service was 99% in 2017, also their cargo claims ratio has declined to 0.2%.

 

Analysis

XPO Logistics is currently trading below its 50 day  (light purple) and 200 day (yellow) Simple Moving Averages (SMA) which indicates the stock might be undervalued, and a possible buying opportunity.

Stock Price and 50 + 200 Day SMA for XPO Over 1 Year (Source: Yahoo Finance)

That being said, the company’s 14-day Relative Strength Index (RSI) is ~27 indicating it is oversold. While XPO might seem bearish currently I believe that they will bounce back up in the long term, because they are investing heavily in new technology as well as trying to acquire more companies. While they may currently have a lot of upfront costs and a gross profit margin of only around 15%, once their investments in new technology pay off they will be able to cut their costs considerably. Another reason I am bullish on XPO is that they are looking to acquire more companies and they have proven their ability to acquire good companies and make them better in the past.

Stock Price and 50 + 200 Day SMA for ODFL Over 1 Year (Source: Yahoo Finance)

 

Old Dominion Freight Line is also trading below its 50 day (light purple) and 200 day (yellow) SMAs. Additionally, ODFL’s RSI is at ~23, showing that it was oversold and might be a buying opportunity. One reason I believe this is a buying opportunity is that over the past 20 years ODFL total revenue and net income increased 18 out of the 20 years, meaning that they are a stable company and will consistently generate good returns. Another reason I believe ODFL will do well in the coming year is that they are currently unionized, and this allows them greater cost flexibility and operational efficiency than that of its rivals that are unionized.

Analyst Recommendations

XPO Logistics

 XPO Logistics currently has a recommendation rating of 1.9, with all the analysts saying XOP is a hold or better. Currently, 18 analysts say to “Buy” or “Strong Buy” XPO, additionally, the stock is currently under many analysts’ price targets.

(Source: Yahoo Finance)

Old Dominion Freight

Old Dominion Freight currently has a recommendation rating of 2.7, with most of the analysts saying ODFL is a hold or better. Currently, 5 analysts say to “Buy” or “Strong Buy” ODFL. Additionally, the stock is currently on the low end of many analysts’ price targets.

(Source: Yahoo Finance)

Conclusion

Both XPO and ODFL are strong logistics and transportation companies, and I think both of them are good investments depending on how much risk/ return you are looking for. People who are looking for high returns at a higher risk premium should invest in XPO because they are investing heavily in new technology as well as trying to acquire more companies. The reason they are a risky investment is due to the fact that if they purchase a company for too much they could lose a lot of money, or if one of their technological innovations does not end up working they could lose a lot of money. However, if the technology and M&A work as planned they could generate a lot of revenue and take a large part of the market cap. On the other hand, if you are looking for a safer bet I recommend ODFL, the reason ODFL is a safer bet is because of their track record of Total revenue and net income increasing 18 out of the past 20 years. One potential risk for them is that they make more than 90% their revenue from America, this is a potential risk because if something happens in the American market they have no other source of revenue to counteract those losses.

 

Bullish I Know First Algorithm Forecast for XPO

I Know First’s algorithm is bullish on XPO in the long term with signal indicator of 415.52 and predictability indicator of 0.86 in the 1-year forecast, this mirrors my bullish outlook on XPO in the long-term

How to read the I Know First Forecast and Heatmap

 

Past I Know First Success With XPO

I Know First in the past has been bullish for the 1-year period( from June 21, 2016, till June 21, 2017) on XPO shares in a past forecast. In accordance with the forecast, the company’s stock price rocketed by 136.12% in that year, compared to 16.54% the S&P grew in the same time period.

(Source: Yahoo Finance)