In recent years, XPO Logistics has rapidly ascended to become one of the world's top ten freight logistics companies through a series of large-scale acquisitions. However, its profitability has failed to keep pace with this expansion, ultimately leading to a dramatic plunge in its stock price. This article provides an in-depth analysis of XPO's acquisition strategy, financial performance, and the challenges it faces to assess its future prospects.
Aggressive Acquisition Strategy
Since March 2012, XPO Logistics has embarked on an aggressive acquisition spree. Through a combination of cash and stock transactions, the company has acquired 17 businesses with the goal of creating a "one-stop" supply chain service provider. XPO's CEO Bradley Jacobs believes that acquisitions enable rapid expansion of the company's influence across various industry sectors, thereby achieving strategic objectives. However, this aggressive growth strategy has raised concerns among industry experts, who argue that XPO's acquisitions have not delivered commensurate returns.
Financial Performance and Return on Investment Analysis
Financial data reveals significant issues with XPO's acquisition approach. Between 2012 and September 2018, XPO accumulated $6.1 billion in acquisition costs while generating only $73 million in cumulative adjusted free cash flow during the same period—representing a capital return rate of just 1.2%. This suggests that XPO's acquisitions have not effectively translated into profitability, with returns substantially below industry averages.
XPO Logistics' Q4 2018 earnings report showed net income of $91 million, far below the $207 million reported for the same quarter in 2017. This disappointing performance triggered a sharp decline in the company's stock price.
Despite the weak fourth quarter, XPO achieved double-digit growth in both revenue and profit for full-year 2018. Annual revenue reached $17.28 billion, up 12.3% from $15.38 billion in 2017. However, this growth couldn't mask the underlying profitability decline. During an earnings call with analysts, CEO Bradley Jacobs admitted: "There's no way to sugarcoat it—we missed the quarter." He attributed the shortfall in adjusted EBITDA primarily to unfavorable conditions in France and the UK, along with profit losses from postal injection services for its largest customer.
Impact of Losing Its Largest Client
Jacobs revealed that the company's biggest customer withdrew two-thirds of its business, worth approximately $600 million. While XPO didn't disclose the client's identity, Reuters and Barron's speculated it might be Amazon, reflecting market concerns that the e-commerce giant might expand its in-house delivery operations. This speculation isn't unfounded—Amazon has been actively developing its logistics network to reduce reliance on third-party providers. If Amazon is indeed XPO's major client, the business withdrawal would significantly impact XPO's performance.
Despite the client loss, Jacobs remained optimistic, stating that XPO could recover the business from other customers. He noted that in 2018, XPO's top five clients accounted for about 11% of total revenue. With the departure of its largest customer, the top five clients' share of total revenue is expected to fall below 8% in 2019. XPO serves approximately 50,000 customers overall, providing a relatively broad client base that helps mitigate dependence on any single account.
Stock Plunge and Share Buyback Program
The market reacted swiftly to XPO's disappointing results. After the earnings announcement, the company's stock price plummeted from $59.54 at Thursday's close to $49.86 at Friday's open—a stark contrast to its 52-week high of $116.27. This dramatic drop reflects growing investor concerns about XPO's future profitability.
To restore confidence, XPO disclosed that since December 2018, it had repurchased 18 million shares for approximately $1 billion. The board also authorized an additional $1.5 billion for stock buybacks. In theory, the lower share price allows XPO to acquire more stock with the same amount of capital, potentially stabilizing the price. However, whether this strategy can truly reverse XPO's decline remains uncertain.
Performance by Business Segment
Breaking down performance by division: XPO's transportation segment generated Q4 revenue of $2.83 billion, slightly above the $2.78 billion recorded in Q4 2017. Growth came primarily from truckload and freight brokerage operations in North America and Europe. Meanwhile, XPO's logistics business reported Q4 revenue of $1.59 billion, up 10.0% year-over-year. Organic revenue growth (excluding fuel and currency effects) reached 12.4%, driven by global e-commerce logistics demand and increased needs from North American consumer goods/food & beverage sectors plus European fashion industry clients.
Industry Opportunities and Challenges
The bankruptcy of New England Motor Freight (NEMF) may present opportunities for XPO Freight. Evan Armstrong, president of Armstrong & Associates (a 3PL research firm), observed: "While NEMF was only a $400 million LTL carrier, there's additional freight needing coverage. This remains a tight capacity market, though LTL generally handles disruptions better than truckload." Jacobs confirmed increased inquiries from former NEMF customers. An XPO spokesperson noted this was typical in such situations, adding that while some freight aligns with XPO's network, other shipments don't fit.
Outlook and Conclusion
XPO Logistics' aggressive acquisition strategy enabled rapid expansion but introduced profitability risks. The loss of its largest customer has amplified market concerns. While share repurchases aim to restore investor confidence, the company faces substantial challenges moving forward. To achieve sustainable growth, XPO must reevaluate its acquisition approach with greater focus on integration and operational efficiency. Whether XPO can successfully navigate these challenges and return to growth remains to be seen.