XPO Logistics Jumps Higher on Strong Earnings Growth, Future Guidance

By Markets Fool.com

Businesses have to get goods from one place to another, and handling logistics is one of the key things that XPO Logistics (NYSE: XPO) provides for its customers. Rather than trying to funnel all of its clients into a single mode of transportation, XPO instead takes advantage of other providers of transportation services to offer the optimal methods for each type of shipping. Coming into Wednesday's third-quarter financial report, XPO investors were looking for considerable improvement in the company's financials, and they weren't disappointed with what they saw.

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Let's take a closer look at XPO Logistics' results and whether the company can keep up its momentum going forward.


Image source: XPO Logistics.

XPO Logistics hits new records for net income, free cash flow

XPO Logistics' third-quarter results were quite impressive. Revenue soared 57% to $3.71 billion, and that was almost enough to keep up with the 60% growth rate that investors following the stock were hoping to see. The company reversed a year-ago GAAP loss by posting positive net income of $21.3 million, and adjusted net income more than tripled from year-earlier levels, producing adjusted earnings of $0.41 per share. That was nicely ahead of the $0.37-per-share consensus forecast among investors.

Taking a closer look at XPO Logistics' segments, investors found solid performance throughout the company. The transportation segment saw revenue jump by almost three-quarters to $2.4 billion, with the company pointing to the acquisition of Con-way as driving the majority of the gains. However, XPO also cited organic growth and lower fuel costs in helping the division, and rising e-commerce business also helped boost results. Operating income more than quadrupled from year-ago levels, and adjusted EBITDA came close to tripling.

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The logistics business saw more modest gains that were nevertheless still quite strong. Segment revenue was up more than 35%, and those numbers came despite currency-related headwinds in XPO's European business. Traditional retail weakness held back XPO's North American growth, but stronger e-commerce and technology contracts helped drive gains. Operating income for logistics more than doubled, further helping XPO's bottom line.

CEO Brad Jacobs celebrated how well XPO did under tough conditions. "We achieved this strong performance in a mixed operating environment," Jacobs said, and "in North America, vigorous demand from e-commerce drove growth in our contract logistics and last mile operations, while brokerage and intermodal were generally soft." The CEO also pointed to XPO's success in winning business in Europe as helping the company's international results.

Can XPO keep climbing higher?

XPO Logistics has aggressive long-term goals that it plans to achieve. "We have a well-defined bridge from where we stand today to our target of $1.575 billion of EBITDA in 2018," Jacobs said, and "every component of that bridge is under way." Between optimizing its spending, encouraging cross-selling and market penetration, and adopting global best practices, XPO has every reason to think it can keep building on its past success.

For now, XPO updated its guidance for several periods. For the 2016 year, the company boosted its free cash flow guidance to $175 million, up $25 million from its previous forecast. XPO expects adjusted EBITDA of $1.245 billion, which is consistent with previous guidance after accounting for the $20 million negative impact of its strategic sale of its truckload operation in North America to TransForce. For 2017, XPO expects adjusted EBITDA to grow to $1.35 billion, and similar percentage growth in the high teens for 2018 should get the company to its final goal. The TransForce deal brought in $558 million in cash, which should also help XPO with its growth efforts.

XPO investors were happy with the way that the company did financially, sending the stock up almost 7% in after-hours trading following the announcement. If the logistics specialist can keep up its positive momentum, then XPO Logistics could be at the beginning of a longer period of relative success going forward.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends XPO Logistics. 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.