Transport and logistics giant XPO Logistics, Inc. (NYSE:XPO) has expanded its U.S. contract logistics network by opening two “mega-hubs” on the West Coast, XPO Chairman and CEO Brad Jacobs said Wednesday.
The facilities, both in Southern California, are each 1.2 million square feet. One opened over the summer with no fanfare. The second opened last week. Each facility is dedicated to a single customer, XPO said. The company wouldn’t identify either customer other than to say both are global brands that it has existing relationships with.
The locations will support the customers’ respective e-commerce and retail operations, Jacobs said. More companies plan to use the West Coast as logistics bases to provide nationwide expedited deliveries, the company believes.
Keynoting the last day of the Council of Supply Chain Management Professionals’ (CSCMP) annual conference, Jacobs said the hubs will be the most automated in the XPO system, and will arguably have the most advanced technology ever placed inside a distribution center. For example, each location has already received 400 robots, a number that could easily rise, XPO said.
Contract logistics is essentially a warehousing and distribution service that caters to large businesses. Typically, each facility is dedicated to one customer. XPO has 311 such facilities in North America.
Separately, Jacobs said that Greenwich, Connecticut-based XPO plans to hire about 25,000 seasonal employees to manage what is expected to be an explosive peak holiday ordering and delivery cycle for transport and logistics providers. Jacobs also opened the door to revisiting an initiative launched in January to spin off all of XPO’s four operating units — two in North America and two in Europe — while keeping the company’s North American less-than-truckload (LTL) business. The project was tabled when the COVID-19 pandemic hit.
Jacobs said a spinoff of the four units would “not be my first choice.” At the same time, he and XPO’s board have a fiduciary duty to grow shareholder value. He reaffirmed his belief the company’s valuation has long been compressed by what he calls a “conglomerate discount.” Many analysts and investors think XPO’s business is too complex and multidimensional to clearly understand, Jacobs has said. As a result, Wall Street attaches a lower valuation to XPO than to companies that operate one line of business, Jacobs said.
XPO shares are “very, very undervalued” at present, he said at the CSCMP event.
As a stand-alone LTL carrier, XPO could command the same valuation accorded to companies like Old Dominion Freight Line Inc. (NASDAQ:ODFL), considered by many to be the gold standard of LTL operators, according to Jacobs. In addition, a slimmed-down XPO would be awash with cash from the sale of the four units, each one big enough to be a sizable company on its own.
According to Amit Mehrotra, transport analyst at Deutsche Bank, XPO’s shares trade at 10 times 2020 earnings before interest, taxes, depreciation and amortization (EBITDA). By contrast, Old Dominion’s shares trade at 19 times EBITDA, he said. Mehrotra is bullish on XPO shares, saying they will rise whether the company breaks itself up or not. As of 2 p.m. ET Wednesday, shares were trading up $1.68, to $85.42 a share.
Jacobs said he expects contract logistics M&A activity to heat up in 2021 and accelerate through the decade as large companies pursue cost-effective opportunities to scale their operations. The beauty of contract logistics expansion, according to Jacobs, is that a large operator can efficiently spread costs across a wider base of customers and geographies, bringing more revenue directly to the bottom line.
Another tailwind are decisions by many businesses to outsource their logistics functions to specialists like XPO, which typically can do the job more cost-effectively, Jacobs said. That trend shows no signs of abating, he said.
Though Jacobs remains bullish on the long-term macro and industry outlooks, he said the next six to nine months could be volatile in light of the upcoming presidential election and the ongoing COVID-19 pandemic. Jacobs said the work-from-home trend spawned by the pandemic is here to stay. However, the global workforce will eventually settle into a hybrid structure of work from home and return to office.
Jacobs said the current environment has been beneficial to XPO because it has strengthened the emotional and psychological bonds between employees and with customers. On the other hand, the pandemic has robbed people of the face-to-face interaction that humans are hard-wired for, he said.
XPO is the largest provider of last-mile deliveries of heavy goods such as appliances and exercise equipment. Jacobs expects continued growth in the category, but said it will be awhile before e-commerce completely replaces the in-store shopping experience. Most consumers still want to see the product in person before choosing their purchase channel, he said.
Mainstream uptake of 3D hologram technology, which would provide a fuller online view of a product than consumers currently get, would be necessary for e-commerce to fully supplant the store in the heavy-goods ordering process, Jacobs said.
