In the middle of England, in the county of Leicestershire, a new warehouse is growing technological limits of automation and in the hope of redefining global logistics for a post-Covid-19 world. Inside the 638,000-square-foot space, rail-mounted machines zip between tightly stacked shelves, and robot arms pick up various products in tight spaces, while pallets are automatically packed for loading into trucks.
The products, which include boxes of cookies and chocolate bars, come from Nestlé (ticker: NESN.Switzerland), which occupies the space. But the warehouse was built, owned and operated by a division of
(XPO) dubbed GXO Logistics, which is expected to be split in the second half of 2021.
XPO, a leading trucking service provider, announced the split in December. The company is the creation of Bradley Jacobs, who has spent billions of dollars on dozens of acquisitions over the past two decades to build the company into a global logistics company. XPO stock has returned 31% per annum on average over the past 10 years, including reinvested dividends, more than double the 14% return of the S&P 500 Index. But it could always be better.
By splitting in half, XPO hopes to unleash value in its shipping business while creating new value with GXO as a play on the logistics outsourcing trend. If all goes according to plan, the two shares could be worth more on their own than they are together – and both are worth holding in the split.
After the rotation, Jacobs will continue to manage XPO, which will focus on LTL, shipping, and shipping brokerage for customers. Unlike truck shippers, which carry trailers loaded to the brim with consumer goods, LTL shippers typically make shorter trips and ship industrial goods.
Now is the right time to work in the shipping industry. As the global economy improves, XPO expects its earnings before interest, taxes, depreciation and amortization, or Ebitda, will improve by more than 25% in 2021 to about $ 1.8 billion, an 8% increase from the $ 1.7 billion earned in pre-pandemic 2019 (Many companies use Ebitda as a key financial metric, especially those with more leverage than the medium, like XPO.)
XPO generally achieves around two-thirds of Ebitda in its transport division and a third in its soon-to-be independent logistics activity. This equates to roughly $ 1.2 billion in LTL business. This business looks a lot
Old Dominion Freight Line
(ODFL), which is arguably the most efficient and successful LTL shipper. Old Dominion stock has averaged 32% per annum over the past 10 years and is currently trading at around 20 times the estimated 2021 EBITDA.
Truist Securities analyst Stephanie Benjamin writes that her universe of LTL carriers is trading at around 16 times Ebitda. She has a buy rating on XPO stock and a target price of $ 150, using a valuation multiple below that average to formulate her target price. Even with a slight discount compared to other carriers, XPO could be worth around $ 18 billion as a stand-alone business after GXO split.
In the event of a spin-off, the parent company often overwhelms the news with debt, an underperforming business, or legal or regulatory burden. This does not appear to be the case with GXO. The company’s technology “drives efficiency and precision,” says Malcolm Wilson, CEO of XPO Europe, who will be CEO of GXO. It also lowers shipping costs and “helps us provide better service.”
GXO is expected to earn around $ 600 million in 2021 Ebitda from its 212 million square foot network of warehouse space, but putting a multiple on the new company is a bit more difficult. Third-party logistics providers, warehouse automation companies, and shipping technology companies are trading between 12 and 25 times the estimated 2021 EBITda. It is a wide range. Scott Schneeberger, senior analyst at Oppenheimer, writes that the GXO business is expected to trade with an Enterprise Value / Ebitda ratio well in the double digits. (Enterprise value is basically debt plus equity.) That would value GXO between $ 9 billion and $ 10 billion.
Together, these two figures add up to approximately $ 27 billion. Investors need to consider certain expenses that are duplicated when businesses split in two as well as corporate debt. XPO has nearly $ 9 billion in debt and about $ 7 billion in debt less cash. Subtract the net debt from the potential of $ 27 billion, and XPO stock could be worth around $ 20 billion, up from around $ 15 billion today.
That works out to about $ 175 per share, up about 30% from recent levels. It is not yet really possible to offer a stock market price for independent companies. This will depend on the final count of shares and debt allocations.
There is a caveat: having nearly four times net debt over Projected EBITDA is high for both companies. Rivals
JB Hunt Transport Services
(JBHT) and Old Dominion have little to no net debt on their books. XPO’s leverage is a legacy of its aggressive growth strategy, which has worked well for investors in the past.
Along with successful mergers and acquisitions, the stock has worked because logistics, on the whole, are a really good deal, and it seems to be improving a bit in a post-pandemic world. XPO will soon be offering two ways to profit from the industry.
Write to Al Root at [email protected]