XPO

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

XPO is a leading provider of less-than-truckload (LTL) transportation services, primarily in North America. They utilize technology and a vast network to provide efficient and cost-effective transportation for their customers.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

XPO operates primarily in the less-than-truckload (LTL) transportation sector, meaning they consolidate shipments from various customers to fill an entire truck.

This business model requires extensive logistics and infrastructure, as goods are collected, sorted and moved on a regional basis, a complex undertaking that favors experienced companies. They also provide supply chain services, including brokerage for freight moving and final mile delivery.

Revenue Distribution

XPO primarily generates its revenue from the following segments:

  • North American LTL: Transportation of less-than-truckload freight within North America.
  • European Transportation: Transportation of freight in Europe and surrounding geographies.
  • Brokerage and Other Services: Revenue generated by brokerage and related services.
  • Corporate: Unallocated operating costs and corporate related revenue.

A significant portion of XPO’s revenue comes from North American LTL, while the other segments are smaller but also provide growth opportunities.

XPO’s revenue is generally exposed to the overall economy, and its growth is highly tied to economic development.

  • The transportation industry is undergoing significant technological transformation, with advancements in areas such as automation, route optimization, and data analytics becoming crucial for efficiency and cost management.
  • The industry is experiencing a trend toward “asset-light” models, with companies focusing more on brokerage and logistics services rather than owning and operating assets directly.
  • Supply chain disruptions and increasing freight demand are causing capacity constraints and price increases, giving companies with robust networks and high efficiency an edge.
  • There is increasing focus on sustainability and emission reductions, which may require capital expenditure by various companies.

Competitive Landscape

The LTL transportation industry is highly competitive with both established players and emerging challengers. The main competitors are:

  • Large LTL carriers like Old Dominion, Saia, FedEx Freight and Yellow.
  • Regional players, specializing on particular regions or specific industries.
  • Non-asset providers, such as brokerage companies.

XPO’s advantage lies in the scale of its network and integration of data technologies. It’s size is its main moat, but that’s not impossible to replicate and its competitors such as Old Dominion have shown better operational metrics. XPO differentiates itself using technology for route optimization, real-time tracking, and data analytics for their customers. They have been trying to optimize their network and reduce costs. It has a good brand recognition among shippers.

Financial Analysis

Let’s now dive into XPO’s financials using the latest quarterly and yearly filings. I will also add the latest news and what management has to say about it.

We will heavily prioritize the latest quarterly filings, since this gives the best snapshot of how the company is doing right now.

Recent Financial Results

  • In Q3 2022, XPO’s core business was profitable, generating $96 million in adjusted earnings (before interest and taxes). Operating ratio was 91%, indicating profitability but with room to improve. Their debt declined by $230 million in the quarter.

  • Q3 results show strong growth in XPO’s European business, with 12.4% revenue growth, though this segment is smaller than the North American one. It still shows a good growth direction for the company.

  • XPO is also making use of technology to automate certain tasks. They increased automation 47.9% YoY and are on track to save more than $12 million per year for every 1000 robotic trucks.

  • XPO acquired 28 service centers from Yellow Corporation to expand capacity. This acquisition has been successful and the centers have become operational quicker than expected.

  • For the year of 2022, XPO reported a total revenue of $7.34 Billion, with $515 million in net profit.
    • They achieved significant improvement in efficiency and have begun to generate good profits and cash flow, which is a key element for a company with debt. They’re reducing costs and improving network.
    • Their free cash flow was $207 million.
    • Their operating income decreased to $227 million, down from $486 million the year before and they had restructuring costs of about $50 million. However, operating profit, excluding restructuring costs, has improved substantially.
  • In 2023, they have already announced 2 small acquisitions in Europe to grow further. XPO has focused on integrating acquired companies.
    • In January 2023, the acquisition of Norbert Dentressangle (NDL) became fully owned by XPO and was reincorporated as a part of their UK business, a move that was very important for XPO’s growth plans in Europe.
  • In Q3 2023, XPO reported a 6.7% revenue increase YoY to $1.9 billion, and a positive net income of $77 million, reversing some losses in 2022.
    • Despite the positive results, they stated in the Q3 earnings call that demand has been lower than they expected.
    • This confirms, again, that XPO is highly reliant on macro factors. That may harm the business long term, making the moat less sustainable.
  • Adjusted EBITDA was $188 million, up 33.5%, while operating profit is now positive at $95 million compared to a $77 million loss in Q3 2022. This shows major improvements, even if growth was slow.
  • They also had significant improvement to debt, and free cash flow for operations at $295 million for the first 9 months of 2023. They’re making big efforts in this front. This also points to cost reduction plans in place, since debt and financing costs have been big pains for the company.
Observations from Financials
  • XPO has historically struggled to achieve consistent profitability, but the latest figures point towards better efficiency and a more profitable future.
  • Their recent moves to acquire new service centers and implement new technology to reduce costs are positive.
  • Their high debt position still poses a risk to investors if they’re unable to make interest payments.
  • XPO’s revenue is highly impacted by the overall economy and its profitability tends to fluctuate a lot. This may affect its moat and create instability.

XPO has had issues with profitability and large losses in recent years. While the numbers are getting better, investors should look out for any reversal or slow down in their revenue or earnings.

Moat Assessment: 2 / 5

XPO has a narrow moat that is based mainly on its extensive network and a degree of customer lock-in.

Here are the factors that contribute to this assessment:

  • Network Effect: XPO’s network of freight terminals and delivery infrastructure creates some scale and distribution advantages. The more routes and customers XPO has, the more difficult it will be for others to replicate the network. However, the network effect in LTL is lower compared to other industries. Many customers can be easily served by different LTL providers and switching is not hard for them.
  • Switching Costs: While not high, a degree of switching costs exists. Integrating XPO into a business’s supply chain may create some stickiness, particularly for larger customers that heavily rely on its logistics capabilities. They have built some features that improve customer experience such as real time tracking, which makes it harder to switch to a competitor.
  • Economies of Scale: XPO, because of its massive size, can benefit from scale advantages on fixed costs. However, some of their competitors such as Old Dominion have similar economies of scale.

Rating Justification: XPO has competitive advantages, but they are not very unique or hard to replicate. The LTL industry is very competitive with many players, and they don’t have pricing power to push prices up without attracting new entrants. While they might be able to outperform smaller companies due to their scale advantages, it won’t create a long term moat, given the high competition. So a “2” feels right.

Risks to the Moat and Business Resilience

  • Economic Downturns: The LTL transportation industry is highly sensitive to economic cycles. Recessions can lead to lower shipping volumes, directly impacting XPO’s revenues and profitability. A slowdown can lead to a domino effect.
  • Intense Competition: With many players, including the emerging non-asset-based brokers and large national carriers, XPO faces ongoing competition that could reduce its market share and pricing power. A price war between competitors could directly hurt their profitability, and margins.
  • Operational Risks: Disruptions in its network (from weather, labor, or technology failures) can lead to substantial financial losses. It also has a high reliance on oil, which means that oil price fluctuations will have severe implications to it’s bottom line.
  • Technological Disruption: There’s a possibility that new technologies may disrupt the business and render XPO’s infrastructure and tech investments obsolete. So, the company has to keep up with all the recent tech advancements.
  • Acquisition Integration: XPO has been very acquisitive throughout its history, and these acquisitions might sometimes lead to disruption and less than expected synergies. Integration costs and a bloated organization can harm profitability, and reduce long-term competitiveness.

Business Resilience

XPO has demonstrated some resilience, however the risks mentioned above can be detrimental to it’s performance and profitability. XPO’s management has taken some positive steps to reduce the high debt and streamline operations.

Understandability: 3 / 5

XPO’s business model is understandable at a general level; its main business is transportation of goods. They use many processes and technology to optimize their operations. However, there are a number of things that can make this complex to fully understand:

  • Logistics Complexity: The intricacies of LTL transportation-route planning, freight consolidation, and network optimization-are complex to fully comprehend without specialized knowledge.
  • Financial Statements: XPO’s financial statements are complex due to numerous divisions and its many acquisitions, making it challenging to understand the actual profitability and how well it is performing. This is not helped by the high restructuring charges and one time expenses that may be incurred every year.
  • Technology: They use a lot of different technologies in their business and it may take significant time to evaluate their effectiveness and how it provides them competitive advantages.

Therefore, the business has a moderately high understandability score.

XPO is not the simplest business to understand at the level to evaluate it for an investment decision.

Balance Sheet Health: 3 / 5

XPO’s financial health is mixed. There are several factors to consider:

  • High Debt Level: XPO carries a large debt burden, making them highly sensitive to interest rates and future debt obligations. While XPO is reducing its debt, it is still a big concern.
  • Improving Operating Profit and Cash Flow: In recent quarters and yearly reports, they’ve been showing improvement on their operational profits and cash flow, which is very positive and shows improvements in business efficiency and cost reductions.
  • Tangible Assets: Given their operation involves a lot of physical facilities and assets such as logistics and freight hubs, they have an adequate amount of physical assets.
  • Employee Costs: A significant number of XPO’s costs comes from its employee and driver pool, these are subject to fluctuations, regulations and can make a large impact on profitability.
  • Unpredictability in the Sector: Their sector is tied to economic growth. There’s inherent unpredictability in their revenues because of that, making the business more reliant on external factors than its own management.

Rating Justification: XPO’s balance sheet shows a business with a considerable amount of debt, but with improving profitability, free cash flow and reduction in it’s debt. The underlying business is highly cyclical, which can also be unpredictable. Therefore, the current situation deserves a moderate health score.

In summary, XPO is a company with a narrow moat that is working towards improving its profitability, reducing its debt, and expanding its operations. It’s success depends on its efficiency, capital management, and the economic outlook of the transportation industry.