By Philip van Doorn, MarketWatch
It may have gotten lost in the shuffle of the Brett Kavanaugh saga or The New York Times bombshell about the Trump family’s financial dealings, but investors breathed a sigh of relief Oct. 1 when President Trump announced a new agreement under which the U.S., Mexico and Canada are expected to replace the North American Free Trade Agreement.
Trucking companies XPO Logistics /zigman2/quotes/205483484/composite XPO -3.14% and C.H. Robinson Worldwide /zigman2/quotes/203490767/composite CHRW -0.51% are among the biggest beneficiaries of the deal, said Bill Barker, lead manager of the Motley Fool Small-Mid Cap Growth Fund /zigman2/quotes/200182828/realtime TMFGX +4.12% , along with Charles Travers.
XPO was the largest holding of the Motley Fool Small-Mid Cap Growth Fund as of Sept. 30, making up 7.7% of a portfolio, which is relatively concentrated, usually with 40 to 45 stocks. CEO Bradley Jacobs gained control of Express-1 in 2011 and renamed the company XPO Logistics before bringing the new, expanded company public in 2012.
XPO, based in Greenwich, Conn., itself has expanded through a continual series of acquisitions and is expected to report annual sales of about $17.6 billion, increasing from $177 million in 2011. The company operates in many areas of transportation (including freight brokerage), logistics and supply-chain management.
XPO’s sales (adjusted for acquisitions) are projected to increase 14% in 2018 and 8% in 2019, and its adjusted earnings per share (EPS) to increase 42% this year and another 26% in 2019, according to consensus estimates among analysts polled by FactSet. The shares have returned 22% this year, beating the S&P 500 Index’s /zigman2/quotes/210599714/realtime SPX +1.43% 10% return.
In an interview Oct. 4, Barker said Trump’s new trade agreement with Mexico and Canada has few substantive changes that will affect the trucking industry, meaning “everyone can return to normal life.” He was enthusiastic about the company’s announcement on Oct. 3 that it would deploy 5,000 “intelligent robots” to assist its logistics employees at various logistics facilities. In July, Barker’s colleague Bryan Hinmon called XPO “a technology company disguised as a trucking firm,” as he described its competitive advantage.
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Barker referred to published reports late last year that Home Depot /zigman2/quotes/208081807/composite HD +4.27% and Amazon.com /zigman2/quotes/210331248/composite AMZN -0.57% might enter a bidding war to keep each other from acquiring XPO. That, of course, didn’t happen, and one wonders why XPO’s Jacobs would sell such a hot company in the middle of an incredible growth cycle. XPO’s technological advantage “positions them well ... for automated trucking,” Barker said, while being careful to say he could not predict how long it would take for automated trucking systems to have a major effect on the market.
During the company’s first-quarter earnings conference call May 3, Jacobs said he expected “a big acquisition or two medium-sized acquisitions [to be] announced by the end of this year.”
In the second-quarter call Aug. 2, Jacobs walked back his previous comments, stressing patience: “We are disciplined. We are only going to do a deal when we have a deal that will likely create immense shareholder value. And the reason that we feel that patience is that if we continue to grow EBITDA [earnings before interest, tax, depreciation and amortization] in the 15%, 16%, 17%, 18% range, with the leverage we have on the balance sheet, and then taking free cash flow and paying down debt, each $1 we pay down creates a $1 of equity value,” he said.
Still, the domestic trucking industry is “incredibly fragmented,” even though it is consolidating, Barker said. So it is reasonable to expect Jacobs to remain acquisitive.
C.H. Robinson Worldwide
C.H. Robinson Worldwide is a smaller holding of the Motley Fool Small-Mid Cap Growth Fund and is not as diversified as XPO. But the presence of so many smaller operators in the domestic trucking industry works to its advantage in freight brokerage.
According to Barker, there are 185,000 U.S. companies that own one to five trucks, and 22 companies that own 4,000 or more.