Related tickers: 3D Systems Corporation (NYSE:DDD), XPO Logistics Inc (NYSE:XPO)
One of the greatest growth stories in the market has seen weakness in recent weeks. The company is XPO Logistics Inc (NYSE:XPO), and although its approach is sometimes questioned, history tells us that it will go on to become one of the best performing stocks of the next few years.
A few weeks ago, fellow Motley Fool writer Seth Jayson wrote an article entitled, “Why XPO Logistics’ Earnings May Not Be So Hot.” Since then the stock has ticked lower 7% while the S&P 500 has traded higher by 2.25%. The issues raised in the article were regarding its cash-flow, showing that the company burned a significant cash position, and 27.9% of its operating cash-flow is coming from “questionable sources.”
While all writers/investors are entitled to their own opinions, I have to wonder if any of the points made really matter at this point. Look, I’ve owned XPO Logistics Inc (NYSE:XPO) since September 2011, made it my largest position in February 2012, and have spoken with the CEO of the company at least 10 times. And to appropriately assess the company you have to understand its strategy and what it is trying to accomplish.
Understanding the “vision”
The things that matter for “normal companies” simply don’t apply to XPO Logistics. This is a company that had revenue of just $177 million in 2011 and is currently on a revenue run-rate of $500 million for this year; with 2014 guidance of more than $1 billion. Many transportation companies are showing signs of weakness, and there are many concerned with the overall market. XPO Logistics Inc (NYSE:XPO) simply views weak markets as an opportunity to acquire cheaply, or a strong market to grow more aggressively. Either way, market conditions don’t negatively affect the company, and this is possible through the vision, success, and deep pockets of its CEO, Bradley Jacobs.
This isn’t Jacobs’ first go-around; in fact he has created and built four additional billion dollar companies throughout his career, including United Rentals, Inc. (NYSE:URI). In the past he has always accomplished this feat by acquisitions, cold starts, and having strong management/employees with extensive knowledge of the industry. At United Rentals, Inc. (NYSE:URI), Jacobs co-founded the company in 1997 and in 10 years created a company with revenue of $3.9 billion and 13,000 employees. The company experienced some rough days following the departure of Jacobs, but has since grown to a company with revenue over $4 billion and an operating margin of almost 20%,
A different kind of company
So why do I think that the points made by Jayson in his article do not apply to XPO Logistics? The answer is quite simple, Jacobs is not a CEO worried about today’s stock price, or meeting quarterly expectations. He has a vision, a plan, and has a proven track record of success. Now, if it was Bob-the-Builder trying to execute the same growth plan I would be a bit more skeptical, yet because of his success I am willing to give him the benefit of the doubt.
Personally, I understand the “plan.” In my book, “Taking Charge With Value Investing, (McGraw-Hill, 2013)”, I explain the difference between various CEOs, including a visionary CEO and one whose first concern is the stock. This is important in identifying the unmeasured fundamentals. A stock first CEO issues inflated guidance, is very promotional of the stock (not the company), all the while either himself or other executives selling stock. A visionary CEO is much better, and often you can find value in companies that have such CEOs. These are companies that often fly under-the-radar, but then greatly appreciate all-of-sudden once the market realizes the potential.
A “visionary” stock’s performance
In many ways, XPO Logistics Inc (NYSE:XPO) reminds me of 3D Systems Corporation (NYSE:DDD) back before its large run higher in 2012. In 2009 3D Systems began an acquisition program to fill the gaps in its business and to become more diversified. Yet the market didn’t notice. Therefore, over a period of one-year in 2011 the company made 16 acquisitions. Then, in 2012 the stock rallied almost 300% as one of the better performing stocks in the market.
3D Systems Corporation (NYSE:DDD) has since continued to execute its plan despite the fact that many questioned its vision when it first began. In 2012 it acquired over five acquisitions and has already acquired one in 2013, and its growth has been rapid. The important point is that the market seemingly didn’t notice in 2011 when the company was becoming larger and stronger, and the same can be said for XPO Logistics. The difference is that XPO Logistics is not acquiring tiny companies or patents, its acquisitions are larger and produce meaningful revenue. However, 3D Systems and XPO Logistics’ acquisitions are the same in that both enter the companies into new industries and allow them to steal market share.
I am going to make a bold prediction and say that XPO Logistics Inc (NYSE:XPO) will become the 3D Systems Corporation (NYSE:DDD) of late 2013 and early 2014. Eventually, a company’s stock will appreciate to reflect fundamentals, and XPO Logistics is no longer a $300 million company. I think that XPO Logistics will have a revenue run-rate of $1 billion for 2014 and that it will complete at least two more large acquisitions this year (per guidance). At that point, I think the company will begin to focus on profitability and becoming more efficient. Because at this very moment, efficiency is not the plan, the goal is to grow, and then make changes to become more efficient. At that point, with over $1 billion in revenue, and margin improvements, the market will adjust the stock higher.