Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
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The week after Christmas is traditionally a sleepy time for stock pickers. And yet, up on Wall Street, one banker is still hard at work this holiday season. This morning, megabanker Citigroup reacted to Friday's report from Recode, which said Home Depot (NYSE: HD) may be interested in buying trucker XPO Logistics (NYSE: XPO) so that Amazon.com (NASDAQ: AMZN) can't.
Sketching out its hypothesis, Citi concludes that XPO stock -- which has already more than doubled over the past year -- could rise nearly 50% more in value. Here's what you need to know.
1. What Amazon is up to
In case you haven't noticed, Amazon.com -- already a huge force in selling items online -- has become increasingly interested in delivering items sold online as well. Amazon pays a lot to delivery specialists like USPS, UPS, and FedEx to deliver packages for it. The bigger Amazon's Prime business gets, the bigger an expense this will become for the e-commerce behemoth.
In an effort to control its costs and ensure that its packages get delivered on time (and reduce reliance on UPS and FedEx to do this for it), Amazon has been rapidly building a delivery infrastructure of its own, including warehouses, as many as 40 airplanes, and a fleet of trucks.
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2. What Amazon may do next
As Recode reported last week, Amazon could be interested in buying XPO Logistics and its fleet of 16,000 owned tractors and 39,500 trailers. Recode did point out it was unable to "independently confirm Amazon's interest in XPO." Regardless, Citigroup appears to be taking the rumors about Amazon and Home Depot at face value.
As explained in a write-up on StreetInsider.com (requires subscription) this morning, Citigroup itself believes that "a sale of XPO has always been a possibility," and says that "XPO CEO Brad Jacobs seems likely to be willing to maximize shareholder value" by selling the company "if the opportunity was right."
3. And don't forget Home Depot
Reportedly, Home Depot's plans to buy XPO haven't progressed past the stage of holding "internal discussions ... about a potential acquisition bid" for XPO -- which suggests that Home Depot hasn't yet approached XPO with a purchase price. Nonetheless, an offer could be on the way, as Recode says that Home Depot considers Amazon to be a rival, and wants "to keep XPO out of the hands of Amazon -- which the home improvement retailer believes has also considered buying the logistics company."
Accordingly, Citigroup is raising its price target on already buy-rated XPO Logistics stock from $75 to $110, and says the stock could even sell for as high as $120 in the event of a buyout.
The upshot for investors
When you get right down to it, then, Citigroup's decision to raise its price target on XPO Logistics stock by nearly 50% today rests on not one, but two rumors: 1. Amazon might buy XPO Logistics, and 2. Home Depot might try to buy XPO first.
Neither rumor has been confirmed, but the fact that there are two of them floating around out there increases the chances that a buyout will take place.
That being said, if both rumors turn out to be false, investors who buy XPO Logistics on Citigroup's say-so risk ending up owning a shipping stock in a competitive industry, earning only a 1.1% profit margin, and trading for more than 65 times earnings. Granted, those earnings are growing. (Analysts surveyed by S&P Global Market Intelligence predict profits could more than double next year.) Still, it's a high price to pay, and a risky stock to invest in if the rumors don't pan out.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has the following options: short May 2018 $175 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends FedEx, Home Depot, and XPO Logistics. The Motley Fool has a disclosure policy.