AiroAV Malware Declared: Better Buy: XPO Logistics vs. Knight-Swift Transportation - Jonathan Cartu - Moving & Transportation Services
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AiroAV Malware Declared: Better Buy: XPO Logistics vs. Knight-Swift Transportation

AiroAV Malware Declared: Better Buy: XPO Logistics vs. Knight-Swift Transportation

XPO Logistics (NYSE: XPO) and Knight-Swift Transportation Holdings (NYSE: KNX) have both been major consolidators over the years, assembling powerful collections of assets in different segments of the global shipping industry.

Knight-Swift traces its origins back to a family-owned trucking firm formed in the 1950s, and has used a steady progression of acquisitions to build itself into a coast-to-coast trucking powerhouse with 21,000 employees and more than $5 billion in annual revenue. XPO, meanwhile, is a logistics and brokerage specialist that has used dozens of U.S. and international acquisitions to grow from $177 million in sales to $17 billion in a decade.

But 2019 has been a difficult year for the transport sector, with headwinds including a global slowdown, trade wars and tariff uncertainties, and falling corporate confidence eating into demand and profits. The closely watched Cass Freight Index, a measure of North American freight volumes and expenditures, has trended below 2018 levels for most of the year. And XPO CEO Bradley Jacobs said during a September call with investors that the U.S. has “been in an industrial recession for the last year.”

So is now a good time to buy into XPO or Knight-Swift?

XPO is cruising again

XPO was traveling in the fast lane for most of the last decade — its stock climbed an eye-watering 3,000% over the 10-year period that ended in mid-2018. But then the company hit some speedbumps, starting with a critical short-seller report from Spruce Point Capital in fall 2018, and followed by a fourth-quarter 2018 earnings miss caused in part by its largest customer taking its business in-house. Over a five-month period spanning the end of 2018 and early 2019, XPO shares lost about half their value.

The company admitted it will take some time to replace the business it lost when that large customer — believed to be — hit the brakes. CEO Jacobs in the quarters since has put an emphasis on diversifying the customer base so that no one client has that much of an influence, and building XPO’s digital and e-commerce offerings.

Image source: XPO Logistics.

Amazon took its business elsewhere in part because XPO’s Direct business is a threat to the online retail giant’s scale advantages over e-commerce rivals. Direct aims to be a transport back-office, providing integrated logistics, transportation, and delivery services that will allow retailers to better compete against Amazon. Contract logistics is a massive and growing $120 billion market, by XPO’s measure, and the company has only about a 5% share of it today.

It’s Connect product, meanwhile, is a digital freight marketplace designed to improve customer price transparency and route planning while offering truckers the ability to reduce the number of empty miles they drive. XPO hopes the platform will prove sticky enough to make it the preferred choice for shippers and truckers.

XPO took a hiatus from dealmaking last year when its troubles began and stock cratered, but of late, it has been hinting that it’s ready to rev up the M&A machine again. The difficult macroeconomic environment has brought down valuations, making it an attractive time to go shopping.

Mergers bring added execution risk, but XPO under Jacobs has proven it knows how to pick targets and successfully integrate them. The shares have recovered some of what they lost — they’re up 43% year to date — but remain more than 20% below 2018’s high. Even in a challenging market, XPO shares still have a lot of room to run.

Knight-Swift faces an uphill climb

Knight-Swift is the product of a 2017 merger between Knight Transportation and Swift Transportation that created the nation’s largest full truckload carrier, a designation that means it tends to haul large shipments for individual customers rather than combining multiple customers’ smaller loads into single trucks. About 80% of its revenue comes from trucking, with logistics and intermodal services making up the remaining 20%.

The company has not been immune to the sluggish transport market. In mid-October, management revised its third- and fourth-quarter earnings guidance downward, and provided an initial outlook for the first three months of 2020 that was below analysts’ expectations. In its Q3 earnings report weeks later, Knight-Swift met that reduced guidance, but provided little reason for optimism about the quarters ahead.

A truck driver smiling from his cab.

Image source: Getty Images.

The bullish argument for a quick recovery in trucking involves either consolidation or an uptick in bankruptcies that would drive some excess capacity out of the system. Management on a post-earnings call said that process was beginning to happen, but at a slow enough pace that the prevailing conditions are likely to drag on results well into early 2020.


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