At one level, there’s nothing simpler than the business XPO Logistics (NYSE: XPO) is engaged in: just get things from one place to another as quickly and efficiently as possible. Yet there’s a huge amount of competition in the logistics industry, and XPO has had to stay on its toes in order to find ways to remain among the biggest players in the space while continuing to challenge its larger rivals.
Coming into Wednesday’s second-quarter financial report, XPO investors wanted to see continued signs that the company has tapped into favorable trends related to e-commerce and supply chain optimization. The shipper delivered record results for the quarter, and now many think that another strategic move could help vault XPO further into the upper echelon of logistics companies worldwide.
Staying on schedule
XPO Logistics’ second-quarter results showed the favorable conditions in the logistics industry and the company’s successful approach toward its business. Revenue climbed 16% to $43.6 billion, which was even stronger than the 14% growth rate that most of those following the stock were expecting to see. Adjusted net income was higher by more than 75% to $131.8 million, and that produced adjusted earnings of $0.98 per share. That was better than the consensus forecast for $0.97 per share on the bottom line.
XPO’s growth was generally balanced. For the transportation segment, revenue climbed 15%, some of which came from a relatively weak U.S. dollar compared to foreign currencies in which the logistics specialist does business. In North America, strength in freight brokerage and in last-mile services led XPO higher, while dedicated truckload transportation in the U.K. and France helped lift international results. Operating income for the segment rose by nearly a quarter. Those sales gains also fell through to the bottom line, and XPO cited all of those areas as improving operating income.
The logistics segment saw sales grow at a slightly faster 19% pace. The company highlighted global demand for e-commerce logistics, and it pointed specifically at the fashion industry in Europe and at technology and consumer packaged goods in North America as driving the segment forward. Adjusted pre-tax operating earnings rose more than 20% from year-earlier levels, as XPO cashed in on investments to improve productivity. A record number of new contract start-ups pointed to the strong pipeline that XPO has developed and converted upon recently.
CEO Brad Jacobs celebrated the news. “Our strong second quarter performance,” Jacobs said, “was highlighted by record results for revenue, net income, adjusted EBITDA, cash flow from operations, and free cash flow.” He pointed specifically at XPO’s ability to grow net income at a much faster pace than revenue as a key to its results.
Will XPO make a purchase?
XPO sees good times lasting for the foreseeable future. In Jacobs’ words, “We have innovations under way in every corner of the company, [including] the ramp-up of our XPO Direct distribution network, the build-out of our digital freight marketplace, the expansion of our last mile footprint, and the deployment of dynamic analytics for workforce planning.”
Yet what many investors are looking at is whether XPO will make a big acquisition. On the conference call, Jacobs said that having started off with 250 potential targets, XPO is “now concentrating mainly on about a dozen.” But the CEO was clear that “we are only going to do a deal when we have a deal that will likely create immense shareholder value,” emphasizing the patience and discipline needed to be smart about making the best strategic moves possible for the company and its shareholders.
Absent an imminent deal, XPO highlighted its expectation to meet its previous guidance. That means investors can expect $1.6 billion in adjusted pre-tax operating earnings for 2018 and free cash flow of about $1 billion cumulative for 2017 and 2018.
XPO investors weren’t entirely satisfied with the results, and the stock was down about 1.5% at midday on Thursday following the Wednesday evening announcement. Some of that disappointment likely stemmed from the lack of definitive answers about a potential acquisition. Nevertheless, in the long run, XPO looks like it’s on track to cement its place among the most important transportation and logistics companies in the business, and that should be good for shareholders over time.
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