XPO Stock Forecast: Delivering Success

This article featuring XPO Stock Forecast was written by Clarence Toh, an Analyst at I Know First.

Summary:

  • Superior Business Model increases Competitive Advantage
  • Growth in Free Cash Flow provides more options and opportunities to invest
  • Applying Technology and increasing European Presence will serve to help XPO achieve their financial targets 
  • Current I Know First long-term XPO stock forecast is strongly bullish

XPO Logistics, Inc. (NYSE: XPO) is one of the 10 largest providers of transportation and logistics services in the world. It operates in 32 countries, with approximately 100,000 employees and over 50,000 customers, including 69 of the Fortune 100.

[Source: ttnews]

Superior Business Model

XPO Logistics’ business is fairly simple to describe and to understand as well. It is in the business of providing transportation and logistics services. The key thing that makes XPO Logistics so attractive is their business model. XPO are in leading positions in the fastest growing sectors of transportation and logistics and are in the top three industry positions across all major business units. Over 60% of XPO’s revenues are in industry sectors that are growing at 2 to 5 times GDP. A large emphasis on technological innovation increases their competitive advantage. Some innovations includes Data-driven technology initiatives, such as warehouse automation and digital freight marketplaces. 

As a logistics company, it is important to have a strong, multimodal presence in high-growth e-commerce spaces and omni-channels. XPO is the largest e-fulfillment Third Party Logistics provider in Europe, leading provider of reverse logistics and largest last mile provider for heavy goods in North America. This can be attributed to the combination of scale, expertise and proprietary technology drives high consumer satisfaction levels. 

XPO has substantial advantages of scale. Platform propels XPO’s operating leverage, purchasing power, cross-selling and capacity to innovate. It has not gone unnoticed that XPOhas significant cash flow generation. It is an outcome that can be accredited to asset-light property of 70% of their revenue and 77% of cost basis is variable. XPO raised free cash flow target range for FY 2019 to $575 to $675 million, up from $525 to $625 million. This is a good sign or growth. 

Lastly, it is imperative to note XPO’s ability to outperform the macro in all parts of the cycle. XPO has deep expertise in diverse verticals with different economic cycles. The high mix of contracted business (74% in 2018) adds resilience in economic downturns, providing much stability in a volatile market environment. The result is an expectation of free cash flow acceleration in an economic downturn in the future. 

Cash Is King

[Source: Sovereignman]

The Compound Annual Growth Rate for Revenue and Adjusted EBITDA is 23% and 38% respectively in the past 5 years. XPO also has a strong free cash flow generation in the past 2 years, generating close to $700 million each year. In this latest earnings report, XPO achieved a record-high EBITDA margin of 10.7%. Within the logistics segment, XPO generated organic revenue growth of 4.8%, which is about 3 times the average GDP of the countries where operations occur. With all these cash, one must be wondering what they are doing with it all. The XPO management has been using it and they are using it well. In the second quarter, having about $246 million of free cash flow, XPO took about half of that and bought back stock, took half of that and reduced net debt, to create shareholder value. It does not stop there. In the early part of 2019, XPO registered $36 million in gains from the sale of real estate. In addition to that, XPO have an underutilized office property which is in the process of selling. That has been embedded in the cash flow guidance and in the earnings guidance all year. That should generate cash flow in excess of $50 million and most likely a $5 million to $10 million gain on that sale. This demonstrates their keenness on being lean.

Target Practice

[Source: Shutterstock]

XPO has many financial targets. XPO aims to achieve revenue growth of (1%) to 1% year-over-year, which translates to organic revenue growth of 2.5% to 4.5%. Investors can be interested in the Adjusted EBITDA, which is expected to be in the range of $1.675 billion to $1.725 billion, or year-over-year growth of 7% to 10%. XPO’s stronghold, free cash flow, will likely increase to a figure in the range of $575 million to $675 million. Increasing their UK exposure, XPO signed the largest contract in the history of their European transportation business. This is a multi-year dedicated transportation agreement with British Gypsum for GBP55 million a year. XPO will be partnering with British Gypsum to transform their UK supply chain into a single, digitally managed transportation network. 

Technology Is The Answer, Right?

Tech initiatives boosted XPO’s record Less Than Load (LTL) operating ratio and there is substantial improvement in both LTL yield and brokerage net revenue margin. XPO’s Smart workforce planning was recently piloted in 18 LTL sites with positive results in motor moves per dock hour, and there are plans to implement this in all 290 LTL service centers by the end of 2019. XPO is also enhancing productivity by applying machine learning for dynamic pricing, route optimization of pickup and delivery, linehaul efficiency and yard management. These work streams are the next leg of significant profit improvement in the LTL operations.

[Source: XPO]

XPO boasts superior visibility and control of advanced automation on proprietary warehouse management platform. Data is transmitted consistently to multiple systems, eliminating data silos. Robots work cooperatively with humans or as standalone solutions, tailored to individual customer requirements. The robots can perform several steps of a process by tying in multiple technologies, increasing fulfillment speed and accuracy. Picking/packing robots are effective ways to overcome space and labor constraints, including collaborative robots (cobots) and goods-to-person systems. Productivity improved 4 times with employees supported by goods-to-person systems, and 2 times with employees who work alongside cobots.

Current I Know First Forecast For XPO

The I Know First machine learning algorithm currently has a positive outlook for XPO. The stock is bullish over a 1 year horizon. It is bullish for the 1-year period with a signal of 328.95 and predictability indicator of 0.77.

How to interpret this diagram

Past I Know First Success With XPO

I Know First has been bullish on XPO’s shares in past forecasts. On 5th July 2019, I Know First issued a bullish 1-month forecast for XPO. The forecast illustrated a signal of 5.66 and a predictability of 0.55. In accordance with the forecast, XPO stock returned 17.99% over this period, highlighting the accuracy of the prediction produced by the I Know First algorithm. See chart below.

This bullish forecast for XPO was sent to the current I Know First subscribers on 5th July 2019.

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Algorithmic traders utilize these daily forecasts by the I Know First market prediction system as a tool to enhance portfolio performance, verify their own analysis and act on market opportunities faster. This forecast was sent to current I Know First subscribers.