Finding the Best Value and Upside in Transports

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A few weeks ago FedEx Corporation (NYSE: FDX) surprised the market when it cut guidance citing global demand. The company, which is a major indicator of economic health, always provides a fairly accurate forecast of growth. The company’s outlook included 2.2% U.S. GDP growth for 2012 and then 1.9% growth in 2013, and the company also revised industrial production below analyst expectations. Obviously, the stock slid lower, but during the final three days of last week the stock recovered to post gains of 2.33%. Therefore, some are suggesting that it’s time to invest in the transport sector, but which stocks are presenting the best value and upside?

FedEx is a company with a history of beating its own expectations, and there have been some reports that the Apple iPhone 5 shipments could boost the earnings of FedEx, which may have contributed to its recent gains. However, considering the size of the company and its recent guidance, I think the stock is fairly priced. The company does not pay a good yield and is expecting stagnant growth, therefore I don’t see much upside for this stock, which is currently trading at 13.50x earnings.

Of course we could break down similar companies such as United Parcel Service, but its upside is similar to that of FedEx, therefore it may be best to look elsewhere. If you’re looking at rail companies then you may find some upside, but rail guidance has also been revised downward. The airlines have been strong performers as of late, and in a recent article I chose US Airways Group (NYSE: LCC) as my favorite in the space. The stock gained 11.50% last week after data showed that September traffic rose 2% year-over-year. The company also saw an increased load factor and is adding more seats to its planes, after cutting seats and costs in 2011. The company is posting impressive growth and is undervalued by nearly all metrics. The only problem is its balance sheet, and with this is a company that can’t handle a lot of adversity, you’d have to monitor it closely. Therefore, I suggest looking elsewhere for a good and safe play in the space.

Celadon Group (NYSE: CGI)

When searching for the best investments you must take into account recent performance and valuation. I came across Celadon Group as a company with a diversified presence, investor optimism, and strong performance. The $350 million company is an asset and light asset-based company, operating in these two segments. The company’s already announced that it’s going to exceed bottom line expectations for the current quarter. The company’s top line growth is minimal, but analysts are expecting bottom line growth of nearly 30% over the next year. It currently trades with a forward P/E ratio of 10.16 and has returned over 70% during the last year. It’s a company that grows through acquisitions, and has already acquired “selected equipment assets” from three different companies this year. Overall, I think it has good upside, however it does have some balance sheet concerns with a high debt-to-assets ratio and only $33.65 million in cash.

XPO Logistics (NYSE: XPO)

Companies such as Celadon and even CH Robinson Worldwide may be promising, but their upside is nowhere near that of XPO Logistics, a company with the most upside in the space. All of the other companies here have certain advantages, but none have Bradley Jacobs.  Jacobs is the company’s CEO, following his $150 million equity investment, and he promises to turn this company into a multi-billion dollar juggernaut through a series of acquisitions and cold starts. The stock has more than doubled since Jacobs announced his investment, and why wouldn’t it, this is a man who has built four mult-billion dollar companies throughout his career. The difference with XPO is that this time he has started his tenure with an established company in a fast-growing non-asset based truck brokerage business. His previous “projects” including United Waste Systems and United Rentals were started as an idea, at a kitchen table, and were billion dollar companies within five years.

To read more about Bradley Jacobs and his history click here.

The reason that XPO is my choice as the stock with the most upside is due to its valuation, and also its immediate future. I believe that XPO has upside of 40% in 2012, while other companies in the space could face turmoil due to uncertain growth. The stock is currently priced near $12 after falling from $15.50 over the last three weeks. The company has fallen because of their decision to raise money with a convertible note offering. This is the second time this year that the company has raised money, for acquisitions, and counting its previous offering and the Jacobs investment, the company now has over $300 million in cash, and a market cap of just $210 million.

The upside for XPO lies in the fact that Bradley Jacobs has stayed true to every single promise that he has provided since his tenure began. In the first year he built an infrastructure, an IT platform, and hired an all-time team of executives. But in this current year he has exceeded his own expectations with cold starts and is exactly half way to his revenue run-rate goal of $250 million in acquisitions. Therefore, another $125 million of acquisitions is expected by the end of this year, and I believe we will see one in the next two weeks, or sooner.

In the company’s offering release it clearly stated the purpose as “potential acquisitions.” History tells us that Jacobs is going to make acquisitions, and so far he has acquired companies for very attractive prices. The company chose to proceed with the offering prior to acquiring additional companies, and now it’s ready to roll. A lot of investors don’t understand the way in which an offering works. First off, the offering was oversubscribed, the company wanted $100 million and raised $125 million. But more importantly, the company had an interest rate of 4.5%, which some have questioned due to the low-rate environment. However, keep in mind, this is a non-asset based company. When you get a mortgage you have a house as an asset, but for XPO it does not have the assets, which makes a 4.5% rate very attractive.

After an acquisition the company can not immediately raise money. It had to wait, integrate the Kelron acquisition, and finish all other duties related to the acquisition. The company basically had to stop with acquisitions once it decided to go through with an offering, but now that it’s complete the company can begin the acquisition process. The fact that the company mentioned “possible acquisitions” tells me that the company may already be speaking with another company. I’ve never been the CEO or an executive at a truck brokerage business but I imagine that it takes anywhere from two-four weeks to agree on a price, perform the audit, and announce a deal. As a result, I would be looking for an acquisition in the next two-three weeks, maybe next week. As a result, judging by the performance following its Kelron and Continental acquisitions, I expect the stock to immediately rise following the acquisitions, perhaps to new highs. After the company acquires the additional $125 million in revenue it will be on track to exceed the $500 million revenue guidance for 2013, which will be a major catalyst for XPO, a stock that could be one of the best performing stocks from now till the end of 2013.

Foolish Conclusion

When you assess the upside of any industry you have to look at the valuation and recent performance of stocks. FedEx' revised guidance was a big blow to the company’s stock, and probably should have led its stock lower. The airlines do look attractive with an increase in traffic, but looking forward I think the best value lies in the smaller companies. Both Celadon and XPO Logistics look very attractive: Celadon growing with efficiency and growing its bottom line and XPO Logistics is growing with an all-star executive team and strong top line performance (23.70% last quarter prior to the integration of its recent acquisition) to compliment a company that could see incredible bottom line growth in 2013. I’d look for strong gains from both stocks over the next year, with slow and steady gains from CGI and explosive market leading gains from XPO. 

BrianNichols owns shares of XPO Logistics. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend FedEx. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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