E-commerce sales jumped 23.6% to $6.22 billion on Black Friday, and on Cyber Monday, they rose 19.3% to $7.9 billion, according to Adobe Analytics. You might think this is good news for traditional retailers like Walmart (NYSE: WMT) and Target (NYSE: TGT), but the surge in online sales comes at a cost. E-commerce sales are often more expensive for brick-and-mortar retailers than in-store sales because retailers have to pay for shipping and processing returns, especially as those big-box chains and Amazon are competing to one-up each other on fast and convenient shipping and e-commerce pickup options. The upshot for Target and Walmart is that sales growth for both of them has accelerated as they've invested in the online channel, but costs have risen, too, and profit growth has been muted as a result.
However, one under-the-radar stock looks like a winner from the latest surge in e-commerce: XPO Logistics (NYSE: XPO), the leader in last-mile delivery of heavy goods like furniture and appliances, and a top provider of expedited shipping and less-than-truckload delivery.
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You may not have heard of XPO, but there's a good chance the company has delivered at least one of your online orders or provided logistics services for a retailer you've bought from.
An e-commerce operator with a competitive advantage
XPO has grown considerably in recent years thanks to a roll-up strategy of acquiring several other freight, logistics, and transportation companies, giving the company a unique set of assets that makes it a valuable partner for retailers. That scale and end-to-end supply chain solutions, as well as its wealth of data and investments in technology, give the company a competitive advantage.
Companies look to XPO to guide them when they want to open up a new e-commerce warehouse. XPO has the data needed to tell them the best place to locate a new fulfillment center based on traffic patterns and where their customers are. It has the technology to help the retailer automate. In October, XPO said in October it would deploy 5,000 smart robots to help with the picking process in order to expedite deliveries. In addition, XPO has the trucking and freight capacity and expertise to help retailers ensure their goods get to their customers quickly and on time.
XPO's unique appeal to retailers revealed itself a year ago on reports that Home Depot (NYSE: HD) was considering acquiring the company to advance its own e-commerce operation -- and in part to keep it out of the hands of Amazon (NASDAQ: AMZN).
That acquisition never came to fruition, as Home Depot never made a public offer. However, it's easy to see how the company's unique positioning would make it an acquisition target for a large retailer, or even another shipping company like UPS or FedEx.
Finally, the secular growth in e-commerce also gives the logistics provider a long-lasting tailwind for continued growth. E-commerce sales in the U.S. have increased by about 15% every year since the recession, and they look set to outpace that clip during this holiday season. However, e-commerce still makes up less than 10% of total retail sales in the U.S. With Amazon's rapid growth, its transformation of the broader retail sector, and the inherent convenience of online ordering, e-commerce's growth should continue for many years to come.
Why you're smart to buy it today
XPO shares have gotten rocked recently, falling along with the broader market sell-off. XPO shares are down 36% since the end of September as third-quarter results disappointed due to a customer bankruptcy, a New York Times report on questionable labor practices at XPO warehouses, and concerns about slowing economic growth have weighed on the stock.
However, none of these issues affects the company's underlying long-term business. The impact of the bankrupt customer will fade away; headline risk about labor practices is not so serious as this is not a consumer-facing company; and e-commerce will continue to grow even if the economy slips into a recession, especially as big retailers have invested in faster shipping and XPO continues to gain share from brick-and-mortar retail.
After that sell-off, the stock is significantly discounted, selling at a P/E of just 25, its lowest valuation in at least five years. With gas prices down and online sales surging over the holiday quarter, XPO looks set to have a bumper holiday season. The stock could easily bounce back to its former heights, which would give it more than a 50% gain, especially if it delivers a strong fourth-quarter earnings report.
Now looks like a great time to pick up a few shares of XPO.
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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. Jeremy Bowman owns shares of Amazon and XPO Logistics. The Motley Fool owns shares of and recommends Adobe Systems and Amazon. The Motley Fool has the following options: short February 2019 $185 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot and XPO Logistics. The Motley Fool has a disclosure policy.