XPO Logistics Looks Ahead to Busy Next 6 Months

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It has been more than five months since XPO Logistics (NYSE:XPO) announced its $335 million acquisition of Pacer International. Since then, shares are down 11 percent, but given the company’s guidance, investors have reason to believe the next six months will be bullish.

In case you’re unfamiliar with XPO Logistics, it is one of the market’s fastest-growing companies. It’s a freight brokerage firm, basically a middleman that connects trucks to customers who need trucks. Two years ago XPO Logistics had annual revenue of $177 million, but today the company is on a revenue-run rate of $2 billion and facilitates more than 25,000 deliveries a day in North America.

XPO Logistics’ growth strategy has revolved around acquisitions and cold starts. With acquisitions, the company has been selective in purchasing companies that give it a competitive edge in a particular segment within the transportation sector. Specifically, Pacer gave it a large exposure to the rail business, and others like 3PD and Optima Services Solution increased XPO Logistics’ market in long haul high-margin businesses.

After acquiring, XPO Logistics scales these acquisitions larger. In a recent interview with company CEO Bradley Jacobs, he explained that 39 percent of total miles traveled for Pacer are empty versus an industry average of 25 percent. He added that every 100 basis points of improvement equals $1 million of bottom-line contribution.

This serves as one example of how XPO Logistics buys companies it hopes to improve by increasing each acquisition’s scale with a larger overall network. During the company’s last quarter, it saw organic growth of more than 50 percent year-over-year, which is a great illustration that its acquire-and-improve business model is working.

With that said, XPO Logistics has been quiet in recent months — five, to be exact — with no acquisitions. Since Jacobs made his $150 million equity investment and became the CEO two years ago, he has set goals and has met each and every one, which includes 11 total acquisitions. Following the Pacer acquisition, Jacobs said that XPO Logistics would acquire at least another $400 million in annual revenue during the remainder of 2014.

So far we have yet to see one additional dollar acquired, and with six months left in the year, investors must believe that the back half of 2014 will be busy. Furthermore, Pacer was an enormous acquisition, but historically, XPO Logistics has made smaller purchases. This fact has to make investors feel confident that acquisition volume will be high, which is good, seeing as how such purchases drive the stock higher.

Nonetheless, XPO Logistics’ stock has slid in the last three months by more than 15 percent, and one reason might be the lack of M&A. Fortunately, this is a trend that should change as we look ahead, meaning the company’s recent performance should create a golden opportunity. In retrospect, this is a $1.4 billion company with guidance to become a $7 billion company in the next three years with mid-single-digit operating margins. In other words, there are large gains to be created, and every pullback should be seen as an opportunity.

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