Is XPO Logistics Stock A Buy?

The world gets smaller with every new piece of technology. The Internet connects suppliers, distribution centers, vendors, and customers, but that’s only part of the equation.

Logistics companies are the ones that do the heavy lifting. They move goods from one place to another, from raw materials to finished products, and they keep supply chains flowing. Making an investment in a logistics company is equivalent to investing in that reality, but you have to choose the right firm.

Logistics companies like UPS and FedEx are well-known, but they are not the only players. XPO Logistics [XPO] is amongst the top ten in global logistics, and Gartner just named the company as a Leader in the 2020 Magic Quadrant for Worldwide Logistics. Here is what you need to know.

XPO Logistics Has 100,000 Employees In 30 Countries

XPO Logistics has 100,000 employees, over 1,500 locations, and a physical presence in 30 countries. Its customers are divided into two business segments: Logistics and Transportation.

About two-thirds of the company’s revenue comes from transportation services, and the remainder is from logistics services. The Logistics segment is centered on services that relate to the supply chain.

This includes e-commerce fulfillment as well as reverse logistics and aftermarket support. Logistics at XPO also includes value-add services like packaging and managed transport.

XPO’s Transportation segment focuses on the actual movement of goods. Truckload and freight services fall under this umbrella. XPO offers expediting, global forwarding, and less-than-truckload as well.

Is XPO Logistics Stock A Buy?

XPO has been making a name for itself in some niches of the industry, especially e-fulfillment (Remember that Gartner award). Right now, the company is leveraging its ability to provide a range of services that appeal to e-commerce specifically and develop those into true differentiators.

Almost 2% of XPO’s staff are IT professionals, and they are charged with connecting the dots to drive innovation. Furthermore, that technology is scalable and integrated throughout the company’s platform, making it a big draw for potential customers.

XPO Logistics is also diversified. It has customers in almost every industry, and that business is distributed well amongst verticals. The company is also diversified across locations.

While some 59% of XPO’s revenue comes from the United States, the balance of countries is varied. Sales from France and the United Kingdom are 12% each while Spain is next at 5%. The remaining 12% of XPO’s revenue is spread across 26 other countries.

However, an eye towards innovation and decent diversification in revenue streams is only scratch the surface here. There are several reasons to get encouraged about the future of this stock.

First, XPO is in some robust sectors that have had steady growth and demand for several years. Transportation and logistics are big businesses, and XPO targets them through innovative solutions that support e-commerce as well as omnichannel supply chains.

Further, XPO does not have shallow relationships in the places where it operates. It has density as well as scale. Plus, the source of XPO’s revenue is asset-light.

In addition, XPO differentiates itself with world-class talent, and it is working on a series of profit initiatives that could deliver as much as $1 billion in process improvement.

Risks of Investing in XPO Logistics

That said, there are risks surrounding investment in XPO Logistics too. The economy is a significant issue, especially in the time of COVID.

Any degree of a recession tends to reduce freight volumes, and that would have an impact on XPO’s bottom line – but XPO isn’t just any company.

While the effect of an economic downturn on the company would be significant in terms of both logistics and transportation, there is another element to consider here.

Transportation costs may not decline. They could even go up on a per-parcel basis, increasing the cost of goods sold for XPO and eroding profit margins on the shipments the company does move.

Also, keep in mind that transportation can involve shipments that move before the company receives payment for those services. In a recession environment, this could mean that XPO doesn’t get paid for work it has completed.

Remember, logistics and transportation involve connecting the dots to move merchandise. If one of those “dots” – say, a warehouse or a distribution agency – goes out of business, XPO may have to use a different connection. This alternative could cost more to use or be less reliable. Each possibility could harm XPO’s ability to earn revenue.

Finally, COVID could impact XPO’s operations. If the company has an issue with COVID within its ranks or has to close down for deep cleanings, it may not be able to handle the same volume of work as it did before the pandemic.

Will XPO Logistics Competitors Beat It?

Competition in the transportation and logistics industry is significant. Some rival companies may offer broader networks or simply have more name recognition.

They also may have partnerships in place that give them an advantage. XPO has to win out against those odds. The company also has to face down competitors that may have larger economies of scale or otherwise have more flexibility with pricing. This could cause XPO to lose out on projects to those rivals.

XPO Logistics Stock Forecast: The Bottom Line

XPO’s network of people and assets is highly integrated. Together, they serve more than 50,000 people across a range of geographies and services, and they deliver tech-savvy transportation and logistics solutions.

XPO is looking to do even more. Right now, the company handles 160,000 shipments every day and oversees seven billion units of inventory, but it wants to expand.

Some of the company’s profit-preserving initiatives may help that as well as its sheer range of offerings. XPO Logistics has services that appeal to any company that requires shopping or logistics services. The company values the “addressable opportunity” at $1 trillion.

That estimate may be accurate, but the question remains whether XPO can get a seat at that table. With the COVID crisis ongoing and escalating, the company may have a hard time maintaining revenue or preserving the profit margins on the work it does get.

XPO Logistics may be able to weather the storm, but investors should understand the risk before buying stock in the company.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.