Headwinds, Competition For XPO Logistics Send KeyBanc To Sidelines

Competitive concerns around big and bulky final mile providers prompted a KeyBanc Capital Markets analyst to move to the sidelines on XPO Logistics Inc XPO.

The Analyst

Analyst Todd Fowler downgraded XPO Logistics from Overweight to Sector Weight

The Thesis

Public carriers have expanded their presence in the BBFM market recently, with a spate of M&A news flow including J B Hunt Transport Services Inc JBHT announcing its second BBFM buy in 18 months, Fowler said in a Sunday note.

The announcements validate the attractiveness of BBFM, with e-commerce growing in the mid-teens compared to low-single digit growth for freight as a whole, the analyst said. 

XPO, with its first-mover advantage, has a 7-percent share, but competition from well-established and well-capitalized firms could slow its growth from to the mid-to-high teens to low-double digits, Fowler said.

XPO's updated guidance reflects geopolitical uncertainties and macroeconomic weakness in Europe, where it has the highest exposure, he said. 

Notwithstanding BBFM softness, Fowler said XPO has co-specific avenues to drive revenue growth and margin improvement. The analyst sees favorable free cash flow supporting reduced leverage and share repurchases under the $1-billion authorization announced in mid-December.

Against this backdrop, KeyBanc said the hiring of a CFO with public company exposure and an acquisition track record could be a catalyst. The firm also sees XPO's valuation as reasonable.

"That said, final mile has been viewed as a key differentiator, with increased competition a potential, incremental negative, while ongoing European headwinds imply higher growth in remaining segments to achieve EBITDA targets." 

The Price Action

XPO shares were slipping by 4.35 percent to $60.26 at the time of publication Monday. 

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Photo courtesy of XPO Logistics.