XPO Shares Back Off Amid Soft Results, M&A Impatience

The near-parabolic multi-year rise in XPO Logistics Inc XPO hit a speed bump on Thursday as investors took a cautious view of third quarter results and signs of impatience surfaced about the timeline for the company's long-awaited return to the mergers & acquisitions field.

Shares in XPO sold off sharply at Thursday's open, at one point falling more than $7 before recovering to close at $86.99, down $2.39. XPO shares had been dropping after hitting an all-time closing high of $114.54 a share in mid-September. At that point, the price of XPO equity had climbed about 8-fold in six or so years, a remarkable run for a transportation and logistics company.

Ravi Shanker, transport analyst at Morgan Stanley, noted that third-quarter earnings before interest, taxes, depreciation and amortization (EBITDA), adjusted for non-recurring events, came in below his expectations by about $9 million. In addition, free cash flow came in lighter than expected by slightly less than $29 million. The shortfalls were blamed on the impact of a bankruptcy filing last month by U.K. retailer House of Fraser, one of XPO's logistics customers. XPO took a $15.6 million charge in the quarter as a result.

Shanker said XPO remains his top pick in the freight transport sector, noting its solid organic growth, a $3.7 billion pipeline of new business with $918 million in business closing last quarter, and strong margin results from less-than-truckload and brokerage.

The company announced that Scott Malat, its chief strategy officer, will step down December 8 for personal reasons. Malat, along with founder, Chairman and CEO Brad Jacobs, drove XPO's ambitious and unprecedented acquisition strategy, buying 17 companies in four years. He will be succeeded by Matt Fassler, a sell-side retail analyst at Goldman Sachs & Co.

It is possible that Malat's departure may signal that XPO will push its long-planned acquisition program into next year. Rating agency Moody's Investor Services, Inc. signaled as much last month when it raised ratings on the company debt. Investors have been waiting more than a year since XPO made public that it would return to M&A for the first time since buying Con-way Inc. in September 2015.

Bascome Majors, analyst for Susquehanna Financial Group, Inc., said today that investors' patience is "running thinner against a cloudier macro backdrop and rising yields in debt capital markets." Majors said, however, he is confident in Jacobs' ability as a superior capital allocator.

Jacobs told Freightwaves yesterday that M&A activity is perking up as valuations have come down and potential sellers are more reasonable in their demands. XPO has said that it would announce 1 or 2 acquisitions during 2018.

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