Is This A Future $100 Stock?

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

XPO Logistics (NYSE: XPO) is a non-asset based transportation provider, a company that rallied 21.5% in the last week alone. In my opinion, XPO Logistics is the best stock in the market, my largest single holding, and my Motley Fool CAPS top pick. In my book, I called XPO Logistics “the investment of the decade” and gave the stock a $100 price target. Here’s why.

An Ambitious Plan

Last week’s acquisition of 3PD for $357 million was XPO Logistics’ largest acquisition, but by no means was it the first, nor will it be the last. It followed four previous acquisitions in 2012, and goes hand-in-hand with the company’s long-term growth strategy.

The company’s growth strategy includes acquisitions and cold starts; XPO had 17 cold starts at the end of 2012 with a revenue run rate of $60-$65 million.

The company’s CEO, Bradley Jacobs, is executing the same plan that allowed him to create Amerex Oil Associates, Hamilton Resources, United Waste, and United Rentals, and turn each into billion dollar businesses. Now, Jacobs is executing this plan with XPO Logistics, having already grown revenue from $177 million in 2011 to a revenue-run rate over $1 billion for 2014.

The “plan” is for XPO Logistics to become a multi-billion dollar company, in the neighborhood of $4-$5 billion annually, which would add significant value to its $420 million market cap.

Not An Overnight Success Story

After XPO’s acquisition of 3PD, myself and fellow bull Brad Loncar were quite excited, which then led to a conversation where I disclosed my $100 price target. Immediately, others begun to email and tweet me, asking how $100 is possible.

Well, it’s not an overnight target, as XPO must still undergo the growing pains that come with an aggressive growth company. However, with Jacobs prior success and the team has built around him, I view XPO’s success as more likely than not.

In fact, the only short-term risk that I foresee is the possibility of dilution. XPO Logistics is not profitable, and is not expected to become profitable until next year. The company had $200 million in cash at the end of last quarter; they received $195 million in non-dilutive financing from Credit Suisse to fund 3PD; but XPO Logistics could still raise another $200-$300 million to fund the next round of acquisitions.

To me, this would be fine, as it takes money to make money. With that said, it’s hard to know for sure. They could raise money next week; they may not raise money at all; or they may raise money in six months. Therefore, I wouldn’t make an investment decision on the possibility of financing.

Competitors Validate The Target

Regardless, I still think XPO Logistics is the best choice in this space, even with the potential overhang of dilution. Its competitors: C.H. Robinson (NASDAQ: CHRW) and Landstar System (NASDAQ: LSTR) are clear examples of the gains that could be created for XPO Logistics.

C.H. Robinson is a third party logistics company, much like XPO, who operates in a network of 275 total offices. The company is the largest of transportation brokerage companies, and is a good example of what XPO could mirror at the end of its operational strategy.

C.H. Robinson has $11.8 billion in annual revenue and continues to grow in the low single digits. The company has an operating margin of 6.2% and trades at 0.83 times sales, which should be the standard of all third-party logistic companies.

Landstar is a non-asset based freight provider, exactly like XPO, with operating margins of 7.3% and a price/sales of 0.89. Landstar is smaller than C.H., with $2.77 billion in annual revenue, but has zero growth.

With Landstar’s metrics very similar to C.H., we can see that a third-party brokerage company that operates effectively should trade around 0.8 times sales with operating margins between 6% and 7%.

Currently, XPO Logistics is trading at 0.4 times its revenue run-rate of $1 billion, which is below its industry peers. Moreover, XPO has growth of about 150% year-over-year, and after its recent acquisition, that growth should explode to near 200%.

If Jacobs is successful in reaching $4 billion in annual revenue, which judging by his track record I view it as highly likely, then a market cap around $3.2 billion would be reasonable. Immediately, bears might point out XPO’s operating margin of negative 9%. However, those people don’t fully understand the business goals of Jacobs.

 Right now, XPO’s goal is growth, after exceeding $1 billion, the goal becomes profitability and efficiency. But keep in mind, one acquisition could drastically change the landscape, such as 3PD, a company whose EBITDA grew more than 30% in the first five months of 2013.

Final Thoughts

With a $3.2 billion market cap XPO would trade at $175 a share. Personally, I think this is conservative, because investors must realize that growth is typically rewarded by Wall Street, meaning XPO could trade above the industry.

Currently, XPO trades at 1.25 times its last 12 months of sales. If this rate continues, a market cap of $5 billion, or $275 a share is possible. Either way, XPO Logistics has a lot of upside, and you can see that my long-term price target of $100, it isn’t irrational. 

Brian Nichols owns shares of XPO Logistics. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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