XPO Returns To Analysts' Good Graces With Solid Second-Quarter Results

For the past several quarters, XPO Logistics, Inc. XPO has been consigned to the figurative "penalty box" by analysts who've seen its pristine track record, and its credibility, marred by consecutive subpar results that had not been expected. Judging by Wall Street's reaction August 2 to the company's second-quarter results, XPO may not have left the box, but it's got one leg draped over it.

The results, reported late on August 1, showed a company capable of navigating a weak macroenvironment through a focus on cost controls and a skillful reliance on information technology investments – $550 million during 2019 – to boost efficiency and margins. Helping mightily was a continued bull market in less-than-truckload (LTL) pricing, which propelled XPO's LTL unit to a 5.2 percent year-over-year increase in contract renewal rates, a dramatic jump from the 3.7 percent year-on-year gain in the first quarter of 2019.

LTL yields surged by nearly 400 basis points, while the unit's adjusted operating ratio fell to a quarterly record of 80.3 percent, meaning it spent 80.3 cents for every $1 in revenue, a stellar figure for an LTL operator. North American LTL will generate $1 billion in annual earnings before interest, tax, depreciation and amortization (EBITDA) by 2021, XPO chairman and CEO Brad Jacobs said. The company did not disclose the unit's current EBITDA.

XPO's North American brokerage results were a microcosm of its work during the quarter – gross revenue fell 14 percent year-over-year, lapped by a strong 2018 second quarter but also hurt by a soft operating environment. Yet net revenue rose 4 percent year-over-year while net revenue margins increased to 20.3 percent, up from 16.7 percent in its 2018 second quarter. The company said it sourced capacity last quarter at 5 percent below the prevailing DAT benchmark.

The bottom-line focus helped XPO post a 10.7 percent margin increase on EBITDA, the largest quarterly gain in its eight-year history. It raised its full-year EBITDA forecast to a range of between $1.675 billion and $1.725 billion, up 7 to 10 percent from prior forecasts. Free cash flow for the year was hiked to a range of $575 million to $675 million from $525 million to $625 million.

Diluted earnings per share were reported at $1.19, which was up from $1.03 per share in the 2018 quarter and above the $1.04 median estimate of 11 analysts polled by Barchart. Adjusted EBITDA rose to $455 million in the second quarter of 2019 from $437 million in the same period in 2018, XPO said. The 2019 earnings excluded $5 million of associated costs. XPO generated $260 million in operating cash flow in the quarter, and $246 million of free cash flow.

XPO got no help from the macro outlook in the quarter, nor does it expect any for the balance of the year. For the quarter, XPO's revenue came in at $4.28 billion, down from $4.36 billion in the same quarter of 2018. Its transportation segment posted a year-over-year decline, while the logistics segment showed a slight gain.

The company now expects full-year revenue to range from a decline of 1 percent to a gain of 1 percent. Jacobs told analysts on August 2 that revenue could weaken further depending on the trends in U.S. industrial production, which is the LTL industry's bread-and-butter. Recent government data have shown flat industrial activity year-over-year.

XPO also faced the lingering headwind of the loss of $600 million in business from its largest customer, widely known to be Amazon.com, Inc. AMZN. The defection began in the fourth quarter of 2018 and the volumes were expected to completely depart by the end of last quarter. Replacing that business will be a second-half story.

XPO said it exceeded analysts estimates in its three primary metrics – earnings per-share, EBITDA and free cash flow. Analysts by and large concurred, with all publishing bullish research notes during the Friday trading session. Shares jumped at the open and stayed high, closing at $71.97, up $7.12 a share on the session.

However, the second-quarter numbers, though excellent given the current economic and industry conditions, have not convinced analysts burned by the events of the recent past to pop the corks. The residual hesitancy may have been expressed best by Bascome Majors, analyst for Susquehanna Investment Group Inc., who titled his otherwise-positive tome "Better Than Feared."

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