On New Year’s Day Stifel Financial Corp. released a report reiterating the bank’s ‘buy’ rating for XPO Logistics stock. Stifel updated XPO’s twelve month price target to $120, but says that their new forecast is not based on last month’s rumor that Home Depot was considering an acquisition.
The Stifel analysts who authored the report (John Larkin, John Engstrom, and Roxanna Islam) think that a purchase by Home Depot is unlikely for a couple of reasons. There isn’t much overlap between XPO and Home Depot’s businesses—XPO only derives about 3-4% of its overall revenue from Home Depot, so it’s difficult to see where the synergies would come from.
Exploiting those synergies would be crucial to any acquisition deal, because Stifel thinks that such a purchase would come at their new price target of $120, which represents a 50% premium to XPO’s trailing 30 day average share price. As Stifel’s analysts wrote, “That implies a takeout multiple on TTM EBITDA of 15.0x.” This is an extraordinarily high multiple for a company that doesn’t have unusually stable earnings, like a utility—it means that very optimistic expectations for XPO’s future earnings have been priced in.
Another point that might discourage would-be buyers of XPO is that the company is sitting on $8B cash that has been marked out for future M&A. Cash generates almost nothing, so it would be inefficient for a buyer of XPO to pay a premium for a huge pile of money that would still have to be thoughtfully invested to bring in a return. Part of the reason why Stifel thinks that XPO’s stock will continue to shoot up in value (they see a 31% upside potential) is that when XPO does spend its money on another acquisition, its revenues should go up again. They anticipate moves by XPO’s CEO Brad Jacobs coming in the second half of 2018.
Jacobs and XPO took a break from acquisitions in 2017 to focus on integrating the companies he had already purchased into a cohesive entity. Jacobs made 17 acquisitions in all since forming XPO six years ago, deals which increased XPO’s revenue nearly 10 times over, transforming the logistics company from a comparatively minor $177M forwarding and brokerage outfit to a $15B juggernaut with a global reach.
A year ago, Satish Jindel, president of SJ Consulting, wrote, “The key to Jacobs’ success in a new industry has been his willingness to recognize what he doesn’t know, engage with experts for dissenting viewpoints, and reward management for results while holding them accountable.”
“We continue to think that the XPO management team has done a stellar job creating XPO as we now know it, but our sense is that the team isn’t finishing executing on its global vision, which involves providing optimized supply chain solutions for its broad and deep customer base,” wrote Stifel’s analysts. “We like the company as the best larger capitalization growth name in our coverage universe that we believe will undoubtedly be aided by the improvement in industry fundamentals we are presently experiencing. In our view, there will be time for a grand strategic exit for master consolidator and XPO CEO, Brad Jacobs, sometime in the medium term future,” Stifel continued.
Stifel’s twelve month price target for XPO at $120 was calculated by applying an 8.5x multiple to their 2019 EBITDA estimate of $2.7B minus 2019 net debt of $6.4B divided by estimated average diluted shares outstanding in 2019. Stifel includes a fully annualized estimate of the impact of a deal, or series of deals, totaling $5B (which is less than the $8B in cash XPO currently has available).
Macquarie, on the other hand, set XPO’s price target at $105, a 14.6% upside from today’s price. Citigroup is one of the few firms rating XPO a ‘sell’—on Dec. 26 Citigroup lowered XPO’s price target from $110 to $75.
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