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United States XPO Logistics Is Breaking Up. Wall Street Loves the Idea.
Wednesday’s news from XPO Logistics that it plans to break into several pieces has the stock jumping. Wall Street sees good reason for the shake-up.
XPO (ticker: XPO) is a provider of both less than truckload and truck brokerage services. The company is going to spin off its brokerage division, which arranges freight hauling between thousands of customers and thousands of truckers, leaving it with the less-than-truckload, or LTL, business.
LTL is just what it sounds like: the hauling of cargoes that are less than a full truckload. LTL typically serves industrial customers, moving cargoes for smaller distances than big trucks traveling across the country.
The primary spinoff isn’t all the company is doing. XPO will sell, or list in an IPO, its European businesses, as well as sell its port-related intermodal operations. Intermodal shipping refers to when freight goes by both rail and truck.
The spinoff and sales come after XPO split in two in 2021. Back in August, the company spun out contract logistic provider GXO Logistics (GXO).
All that has made investors enthusiastic. XPO stock was up 13.8% in premarket trading, while futures on the S&P 500 and Dow Jones Industrial Average had gained about 1.8% and 1.7%, respectively.
Wall Street appears to agree with investors. Deutsche Bank analyst Amit Mehrotra estimates the transaction will create “at least” $13 in shareholder value and “closer to $30 under reasonable valuation assumptions.” XPO stock was up about $8.57 a share at $70.50 in premarket trading.
Comparable LTL and brokerage companies, such as Old Dominion Freight Line (ODFL) and C.H. Robinson Worldwide (CHRW), trade for higher valuations than XPO. Old Dominion trades for about 17 times estimated 2022 earnings before interest, taxes, deprecation and amortization, while C.H. Robinson trades for about 12 times. XPO trades for less than 8 times.
Mehrotra rates shares Buy and left his $120 target for the price unchanged. Cowen analyst Jason Seidl also rates shares Buy, but he increased his price target to $117 from $115. Seidl wrote Wednesday that management was right to pursue the spin, noting that asset sales should also help pay down debt.
Citigroup analyst Christian Wetherbee echoed Seidl’s and Mehrotra’s sentiments in his own Wednesday note, saying that the transactions make the company simpler and easier to compare to its peers. He rates shares at Buy and left his price target unchanged at $98 a share.
Almost 85% of analysts covering XPO stock rate the shares at Buy. The average Buy-rating ratio for stocks in the S&P 500 is about 58%.
The average analyst price target for XPO is up to $98 a share, up $1 from just before the deal was announced.
Based on early Wednesday trading, XPO stock is down about 9% year to date. Shares have fallen along with other transportation stocks. The iShares U.S. Transportation ETF (IYT) is down about 9% year to date.
Write to Al Root at allen.root@dowjones.com
