Buy This Shipping-Company Stock. It’s Worth More Than the Sum of Its Parts.
In the middle of England, in the county of Leicestershire, a new warehouse is pushing the technological boundaries of automation and hoping to redefine global logistics for a post-Covid-19 world. Inside the 638,000-square-foot space, machines on rails zip between tightly stacked shelves and robot arms pluck various products from tight spaces, while pallets are automatically wrapped for loading in trucks.
The products, which include boxes of biscuits and chocolate bars, are from Nestlé (ticker: NESN.Switzerland), which occupies the space. But the warehouse was built, owned, and operated by a division of XPO Logistics (XPO) dubbed GXO Logistics, which is set to be spun off during the second half of 2021.
XPO, a leading provider of trucking services, announced the split in December. The company is the creation of Bradley Jacobs, who spent billions of dollars on dozens of acquisitions over the past two decades to build the firm into a global logistics company. XPO stock has returned 31% a year on average over the past 10 years, including reinvested dividends, more than double the 14% return of the S&P 500 index. But it could always be better.
By splitting in two, XPO hopes to unlock value in its shipping business while creating new value with GXO as a play on the trend toward outsourced logistics. If all goes as planned, both stocks could be worth more alone than they are together—and both are worth owning into the split.
After the spin, Jacobs will continue to run XPO, which will focus on less-than-truckload, or LTL, shipping and brokering shipping for customers. Unlike truckload shippers, which transport trailers filled to the brim with consumer goods, LTL shippers typically have shorter hauls and ship industrial products.
It’s a good time to be in the shipping business. With the global economy improving, XPO is predicting that its earnings before interest, taxes, depreciation, and amortization, or Ebitda, will improve by more than 25% in 2021 to about $1.8 billion—up 8% from the $1.7 billion it earned in prepandemic 2019. (Many companies use Ebitda as a key financial metric, especially ones with higher-than-average debt, like XPO.)
XPO typically realizes roughly two-thirds of Ebitda in its transportation division and one-third in its soon-to-be independent logistics business. That works out to roughly $1.2 billion from the LTL business. That business is a lot like Old Dominion Freight Line (ODFL), which is probably the most efficient and successful LTL shipper. Old Dominion stock has returned 32% a year on average over the past 10 years, and is currently trading at about 20 times estimated 2021 Ebitda.