XPO Logistics’ Recent Loss Creates a Golden Investment Opportunity

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XPO Logistics (NYSE:XPO) shares have fallen nearly $7 off their highs, to $26, significantly underperforming a transportation index, led by UPS (NYSE:UPS) and FedEx (NYSE:FDX), that is also trading off its highs. However, XPO Logistics is not your typical transport investment, and in looking ahead to the future, this weakness might be investors’ greatest value opportunity.

XPO Logistics is a non-asset based truck brokerage firm, much like CH Robinson Worldwide (NASDAQ:CHRW), and through a series of acquisitions and cold starts, it has grown rapidly, including 137 percent in its last quarter. Albeit, the $1.3 billion company has more than $700 million in revenue during the last 12 months, and it is currently on a $2 billion revenue run rate for the next 12 months.

However, $2 billion run rate is just the start of how large this company is going to become, as CEO Bradley Jacobs recently gave guidance for revenue of $7 billion by 2017, or three years. Therefore, this is a company growing fast, will continue to grow fast, and, based on its valuation, will soar higher.

With that said, investors likely wonder, will XPO Logistics succeed in creating $7 billion of revenue with operating margins of 5 percent? Well, as for the latter, it seems very likely, as CH Robinson has operating margins over 5 percent, a company that’s considered the standard within the space. And as for revenue, Jacobs hasn’t failed us yet.

When Jacobs made his $150 million equity investment in 2011, the company had annual revenue of just $177 million. Thus, Jacobs has already grown this company many times over. Therefore, it’d be tough to bet against this guy, or that XPO can become a $7 billion company.

Currently, XPO Logistics trades at 1.9 times sales, but if we apply a onetime sales multiple to $7 billion in revenue, then XPO could be worth $7 billion; this would represent 30 times 2017’s earnings. Due to it being such a growth company, this is a multiple that is very attainable, which also represents significant upside from its current $1.3 billion market capitalization.

With that said, XPO Logistics will announce earnings on May 1, giving us the first glimpse of XPO following its acquisition of Pacer International. If history serves as any indication, don’t be surprised to see another acquisition, or several new cold starts. And while it’s impossible to know how XPO will respond to earnings, long-term guidance implies that upside is tremendous in this under-the-radar growth company.

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