Despite A Solid Q4 XPO Logistics Stock Appears Vulnerable

After a massive rise of around 3x from its March 2020 lows, at the current price of $122 per share, XPO Logistics stock(NYSE: XPO), a logistics and transportation company, appears to be fully valued. XPO stock has rallied from levels of around $40 to over $120 off the March 2020 bottom compared to the S&P which moved 74%. XPO stock has significantly outperformed the market, due to better than estimated quarterly results and the company’s restructuring plans. Also, the stock is up 33% in the last one year despite revenue falling 2% y-o-y over the last four quarters. While the gradual opening up of the economy is expected to lead to higher demand for transportation, the stock appears to be richly valued when compared to its historical levels, making it vulnerable to downside risk. Our dashboard Buy Or Fear XPO Logistics Stock provides the key numbers behind our thinking.

Most of the stock price growth since 2018 can be attributed to the expansion of the company’s P/E multiple. Looking at fundamentals, total revenues declined from $17.3 billion in 2018 to $16.2 billion in 2020, partly due to the impact of the pandemic on the company’s business. Additionally, a contraction of net income margin from 2.4% in 2018 to 0.7% in 2020, meant that the company’s net income dropped to $110 million in 2020 compared to $422 million in 2018. The decline in margins can also be attributed to increased operating costs during the pandemic. Otherwise, the net margins remained relatively stable at over the 2% mark. However, some of the decline from lower revenues and margins contraction was offset by a solid 23% decline in total shares outstanding, due to share repurchases. XPO’s EPS actually declined to $0.87 in 2020, compared to $3.17 in 2018. While the company saw its revenue and profits decline, the P/E multiple has expanded from less than 18x in 2018 to over 140x currently (based on trailing earnings).

OutlookThe coronavirus crisis induced lockdown affected industrial activity and hit the industrial transportation demand. With lower fuel prices, energy related shipments were also impacted. Now that the economies have been gradually opening up, the demand for transportation has increased, aiding the XPO’s top-line growth in Q4 2020. Total revenue of $4.7 billion in Q4 2020 reflected a 13% y-o-y growth. The business has rebounded to pre-Covid levels across XPO’s service lines. More importantly, the stock price growth of late is being driven by the company’s announcement to spin-off its Logistics business, unlocking more value for its shareholders.

The recent surge in Covid positive cases could prove to be an impediment in the path of XPO stock price growth. But in the absence of another wave and re-imposition of lockdowns, the company’s business will likely see strong growth. Any further recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia.

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Currently, investors seem to be buoyed by XPO’s positive revenue and earnings outlook based on the expected recovery in the economic activity, and that appears to be priced in the current stock price of $122, in our view. Even if we were to look at the forward earnings estimate of $3.88 for XPO in 2021, at the current price of $122, it is trading at a 31x P/E multiple, which is higher than the levels of under 20x seen in 2018 and 2019, making the stock appear vulnerable to downside risk.

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