XPO - XPO Logistics

[Guest roark33]

Roll-ups work until they don't....

[rpadebet]

there was a thread for XPO. I think started by Liberty, can't find it anymore.

 

Anyway I would be careful here. The leverage is too high. They are an aggressive roll up and seem to have "diversified" into Asset heavy businesses. They deserve a lower EBITDA multiple for nature of business + increased leverage risk.

[Scudbucket]

http://www.chicagobusiness.com/article/20151007/NEWS10/151009871/buffett-builds-rail-superhighway-to-grab-truck-freight

[kab60]

Anyone have a good short thesis on this? I understand the skepticism re Norbert (management left, French labor laws are tough) and Conway (asset heavy) combined with lots of debt, lots of earnings adjustments etc. and recession fears, but anyone have something more tangible/in depth? Short interest is around 24 pct., it's getting puked out today.

[ratiman]

Read the Glassdoor reviews. The Conway acquisition in particular seems to be a mess.

 

"XPO has systematically wiped out the once superior LTL sales staff. The turnover is unbelievable, a good guess would be half of the estimated 350 AE nationwide have left, and probably 70% of the NAE have moved on!"

 

"Conway Freight LTL made money before you showed up---I'm not impressed with your cost cutting style, and neither is your shrinking customer base."

 

"MANY sales people fired, and found jobs at other Freight companies and "canobonlized" outgoing freight customers.."

[LongHaul]

I did a little work on this company.  Feel free to point out any mistakes.

Red Flags at XPO (In my opinion there are patterns here with other companies that ended badly, particularly Valeant).

 

1. Tons of deals.  Rollup strategy.  Risky.

2. Highly levered

3. CFFO was actually negative in 2013 and 2014.   

4. Read the reviews on Glassdoor, etc.  It sounds like the business is being run terribly by many former and current employees.  There is a Gordon Gecko reference, and at least one Enron reference. 

5. CFO was ex investment banker

6. I could not figure out organic growth from the filings.

7. Audit Committee Member red flag.  Please read this one for yourself, as I cannot even make this up.  See pages 6-10 in below opinion even though complaint was dismissed.  Note that his employment at Novator Advisors is not mentioned in the recent proxy statement. 

 

http://www.nysb.uscourts.gov/sites/default/files/opinions/206057_37_opinion.pdf

 

 

I would run from this company.

 

[kab60]

Holy crap. That Kingshott dude sounds like a great fella'. Didn't some ol' dude say something wise about cockroaches and their relatives? As if it wasn't enough with their messed up financials.

[Guest roark33]

Wow, quite the track record:

 

More recently, Mr. Kingshott was a managing director of Amaranth Advisors, LLC.

[NBL0303]

Thank you for  those thoughts Longhaul.  Those are very interesting and this could perhaps be a really good short idea.

 

One thought: While those allegations certainly present Kingshot in a poor light, it is important to note how hyperbolic and inaccurrate complaints such as these often are.  It would be wrong for us to besmirch this man based on allegations in a lawsuit that was dismissed.  Anyone who has been involved in a frivolous suit knows how the threat of these suits alone is used as a weapon.  There is a deplorable act in this country which has unfortunately become commonplace and I try very hard not to contribute to this harm and that is when a party either threatens or actually files a suit with incendiary accusations.  The complaint alone then tarnishes the person's reputation and even if it the allegations are untrue and are ultimately dismissed, damage was already done.  If we believed everything in every legal complaint, then we would think very negatively of Warren Buffett, Prem Watsa and others that we all admire.

[LongHaul]

I didn't see any dispute regarding his past roles in the complaint.  Here is some more that is related. 

Have to search for his name in the docs.

 

https://assets.documentcloud.org/documents/1183457/gowan-fee-app.txt

 

http://chapter11cases.com/2012/07/01/in-re-dreier-llp-452-br-391-bankr-court-sd-new-york-2011/

 

 

[vinod1]

I spend some time recently on Expeditors and CH Robinson. Took a quick look at XPO as it operates in the same space. The difference especially between Expeditors and XPO in their management approach, operational focus, incentives, etc are huge and I decided to pass up on XPO. XPO investors might do well but just not fit my style:

 

1. XPO went on an acquisition spree using a combination of stock and debt to purchase a bunch of different companies in the 3PL industry. A roll up should have focused on one segment of the industry to try to build a scale advantage. Here it is not obvious that there is scale advantages between the various companies that XPO bought. They span from contract logistics, freight brokerage, global forwarding, intermodal, last mile, truck load and managed transportation. The purported rationale is that there are cross-selling opportunities.

 

Each of the companies they bought probably have some competitive advantages, but that might already be incorporated in the price paid to acquire them. it is not clear how XPO would increase the value of the acquired companies that they themselves could not do.

 

2. In this industry, growth through acquisitions might not add value. A 3PL company's main asset are its employees and their relationship with shippers and carriers. The employees use certain business processes and IT systems to perform their tasks and when they are acquired they need to be integrated into the parent company's processes and systems. If not, each of the acquired company would have their own processes/systems and there would not no cost savings and cross selling benefits. Training and integrating an acquired company's workforce is difficult – inherent resistance to change, can go and compete on their own, etc.

 

3. Management seems to be too promotional. They see a need to highlight Brad Jacobs accomplishments in his early companies in their quarterly results presentation - how much he has compounded shareholder wealth at the two previous companies. This seems tailored to fuel greed in investors and overlook the weak results. Why does a CEO needs to focus so much on impressing the investors?

 

4. The answer to that seems to be the stock price. His pay is tied to adjusted EBITDA and stock price being above a certain level like $60 for 20 days in 2018 and $86 for 20 days in 2020, in which case he gets a certain incentive payout. So much focus on stock price and adjusted results would likely cause other problems.

 

Vinod

 

[LongHaul]

Excellent Post Vinod!

[kab60]

I agree on most points but not nr. 2. Danish DSV is a very good example of how much value acquisitions can add (they also have the best management team that I know). Their most recent acquisition announcement sent the stock up 7 pct. But they buy stuff that they can optimize if not exactly turnaround.

[Graham Osborn]

I did a little work on this company.  Feel free to point out any mistakes.

Red Flags at XPO (In my opinion there are patterns here with other companies that ended badly, particularly Valeant).

 

1. Tons of deals.  Rollup strategy.  Risky.

2. Highly levered

3. CFFO was actually negative in 2013 and 2014.   

4. Read the reviews on Glassdoor, etc.  It sounds like the business is being run terribly by many former and current employees.  There is a Gordon Gecko reference, and at least one Enron reference. 

5. CFO was ex investment banker

6. I could not figure out organic growth from the filings.

7. Audit Committee Member red flag.  Please read this one for yourself, as I cannot even make this up.  See pages 6-10 in below opinion even though complaint was dismissed.  Note that his employment at Novator Advisors is not mentioned in the recent proxy statement. 

 

http://www.nysb.uscourts.gov/sites/default/files/opinions/206057_37_opinion.pdf

 

 

I would run from this company.

 

Hi LH, are you evaluating the company as a short candidate and if so what is your valuation/ process?

[LongHaul]

I don't short sell equities with unlimited downside, as it is too risky and tough.  The historical records of those who short a lot is terrible going back even to the 1600's Dutch exchange (Dutch from one line in a book anyway) so I just pass on the activity.  I did a lot of shorting in a "former life" and am intrigued by it and frauds.

 

If XPO blows I have no idea of the timing.  The CEO's strategy makes zero sense to me.  I predict it will be a disaster and the CEO's "track record" will go up in flames.  How someone achieved a track record is just as important as the track record in my opinion. 

 

Feel free to PM me for another interesting datapoint on the company.

 

Edit:  Removed incorrect usage of naked short selling.

 

 

[LongHaul]

United Rentals History - B. Jacobs was CEO during this time.

 

 

"United Rentals, a large equipment-rental company, has reached an agreement with the Securities and Exchange Commission to pay $14 million to settle civil financial fraud charges stemming from the improper use of sale-leaseback transactions and a broad range of other improper accounting practices.

 

The alleged fraud involved the recognition of revenue tied to six sale-leaseback deals between 2000 and 2002 and related alleged fraudulent sales of used equipment in return for concessions to suppliers during the same period. URI’s then-CFO Michael Nolan and its then-vice chairman and chief acquisitions officer John Milne, also a former CFO of the company, put the fraud together mainly via a series of interlocking three-party, sale-leaseback transactions, according to the SEC, which previously charged them with individual wrongdoing."

http://ww2.cfo.com/accounting-tax/2008/09/united-rentals-settles-sale-leaseback-fraud-charges-with-sec/

 

 

 

Former United Rentals President Milne Charged With Securities Fraud

 

John Milne, former vice chairman, president and chief financial officer of United Rentals was indicted April 4 by a federal grand jury for conspiracy, securities fraud, insider trading and making false filings with the Securities and Exchange Commission. Federal prosecutors say Milne used insider information when he sold 850,000 shares of United Rentals stock and made more than $22 million.

 

http://rermag.com/headline-news/former-united-rentals-president-milne-charged-securities-fraud

 

 

 

[LongHaul]

This SEC complaint was worth a read.  URI used a variety of accounting shenanigans. 

 

SEC United Rental complaint

https://www.sec.gov/news/press/2008/2008-190.htm

 

It is a good reminder that acquisitions add complexity to businesses.  The complexity is an opportunity for deceit.

[Graham Osborn]

Excellent Post Vinod!

 

+1.  While I'm not a big fan of rollups in general, I have to concede some of them make their investors a lot of money for a while.  The good ones - as Vinod notes - hopefully capture some synergies which will help with the debt repayment.  When non-synergistic businesses are acquired, one begins to suspect that the primary motivation underlying the consolidation is acquisition accounting benefits and/ or pay packages ties either to adjusted EBITDA or deals themselves.

 

To your other post LH, I was not quite sure about your reference to naked shorting.  I don't know anyone who does that.  As to regular shorting, statistically it has worked poorly because markets usually go up.  That hasn't been the case for all periods in history however.  For stocks that have been on the decline for > 6 months (but haven't taken a huge hit to date) I think it is reasonable provided (1) the stock is overvalued by at least 2-3x (2) there is some other factor which suggests the company might face an imminent bankruptcy.  Also, technical shorting has not worked for me; you need to be willing to stay with the position sometimes for 1-2 years which means you'd better have a strong fundamental view.  If you use mental stops a wider stop of perhaps 15% is indicated; if you're regularly getting stopped out above that level you may be in a new bull market or you might be buying too far off the highs.  Takeover risk relates to the general bullishness of the market and the premia tend to decline along with the multiples.  Needless to say smaller companies (< 5B) are more vulnerable to this risk, which will probably be the sticking point for me on XPO.  As always, diversification and sound portfolio management are key.

[Graham Osborn]

One other interesting thing to note is XPO has a strongly positive Beneish (-0.23 for 2015).  I was running a rollup screen with Beneish > -1.78 and EV > 5B and this one popped up along with NXPI, UA, TARO, OPK.  Only XPO had the death triad however (NXPI kinda does but not really).  I consider the death triad mandatory for a rollup.  So evidently the screen is not that good :) It did at least bring my attention to the Beneish however.

 

There are some things that concern me about this one as a potential short however.  The short float is nearly 28% and the OTM puts (good to look at) are very pricey.  The EV is big but not that big.  It seems like a good setup for a whipsaw.

[LongHaul]

The other item is XPO keeps issuing shares.  If XPO shares are wildly overvalued then this actually increases per share value.

[Graham Osborn]

The other item is XPO keeps issuing shares.  If XPO shares are wildly overvalued then this actually increases per share value.

 

Warren Buffett used to short stocks, and confided some of the shortcomings to Einhorn.  One was that the "best" shorts are often run by crooks, and "you may run out of money before the crook runs out of ideas." Also that watered-stock issues can often grow into value through new issuances as you describe.

 

My response to this is that capital availability is either procyclical or slightly precyclical.  If Einhorn had shorted Allied with the additional view of a subprime credit meltdown, the position would have worked out.  When you short smart, you're not just shorting a company but a system as well.  The short position is just a way of expressing a much bigger idea about the availability of financing.  IMO, one needs macro/ fundamental/ technical alignment to justify it.

[Phaceliacapital]

So you just eyeballed it in 5 minutes, eh?

 

When the Norbert Dentressengle acquisition closes in a few months they'll be at close to 9bn in revenue, and they're guiding to 625m in EBITDA for 2015 (but profitability will look bad as long as they keep investing this heavily in cold starts and the IT/HR platform, but once that's done, these fixed assets will be able to support a much bigger company, so they should get nice leverage out of it going forward). I don't think it'll take 6-7 years to get to 12bn. Wouldn't be surprised if they reached that in 2016 (they just raised more for new acquisitions). A lot of the newly acquired revenue is in contract logistics, which has a better margin profile and higher barriers to entry.

 

Anyway, it's an interesting one.

 

So yeah, it did not take them 6 - 7 years.. it took them just one year after your post.. They are now aiming at 15 bn in revenues and 1.1 bn in EBITDA, of course, +10 bn of that revenue increase comes from their two latest acquisitions.

 

I looked at the file and cannot shake the feeling that there is some fishy stuff going on, either the guy is super contrarian and a master integrator/acquirer, or he is buying revenue to mask growth. I do not understand his move towards asset heavy stuff and have found on several messaging boards indications that he took the asset heavy business in the package deal as he otherwise could not have bought Jacobson & Menlo.. He lost Jacobson to ND and bought ND less than a year later, he made an offer for Menlo, couldn't get it and thus bought the whole company. Apparently soon after he put these assets for sale but could not get the price he wanted to comply with his debt covenants..

 

Either he has learned throughout the years that he had to change his strategy or this tidbit from his initial introduction is quite strange:

 

"After I stepped down as chairman of United Rentals in 2007, I started looking for my next big thing. I studied a lot of different industries, and I ended up concentrating on transportation and logistics. It’s larger and more fragmented than the industries I’ve been involved with in the past. It’s more than $3 trillion worldwide.

Once I settled on transportation, I first looked at an asset-heavy trucking company roll-up, but I couldn’t figure out a way to create the kind of shareholder value I was looking for. I wanted a higher return on capital. Then I discovered C.H. Robinson and Expeditors International of Washington. C.H. Robinson is the leader in truck brokerage, and Expeditors is the largest U.S.-based freight forwarder.

"

 

Also, when he bought ND he disclosed the following in the CC:

 

"One of the reasons that we are excited about buying Jacobson is Scott Temple is a really good manager and he's got

great managers under him and we don't want to lose any of those guys. And we want to figure out a way that we can

combine the companies, put them together and everyone will be happy both employees and customers and

shareholders, and there will be a way."

 

The same Scott Temple quit XPO 4 months later..

 

So yeah, either they run a contrarian grow or go competitive strategy, or something's not completely right ...

 

Too hard pile?

 

[Graham Osborn]

I'd say the moves over the past few days kind of feed into the idea that oversubscribed ideas carry their own unique set of risks in the short term.  That high a short float coupled with a promoter-CEO is a recipe for pain.  OTOH, I don't genuinely believe that the short float affects the ultimate outcome if one can ignore such moves and hold for a few years.

[Spekulatius]

I have to admit, XPO looks pretty good as a short candidate. High debt load, rollup, shady CEO - that is quite a good triage predicting problems.

I will predict that much - they will do more acquisitions as well. They have to , most likely to mask issues with their ongoing business.

 

Now I don't do shorting, but this is almost as good as it get's.

[Graham Osborn]

I can't help noticing the top institutional holders of XPO include:

 

Owner Name Date Shared Held Change (Shares) Change (%) Value (in 1,000s)

ORBIS ALLAN GRAY LTD 06/30/2016 20,067,346 2,105,171 11.72 735,268

ORBIS HOLDINGS LTD 12/31/2015 15,993,172 6,303,713 65.06 585,990

PUBLIC SECTOR PENSION INVESTMENT BOARD 06/30/2016 13,637,746 0 0.00 499,687

SPRUCE HOUSE INVESTMENT MANAGEMENT LLC 06/30/2016 7,750,000 0 0.00 283,960

ONTARIO TEACHERS PENSION PLAN BOARD 06/30/2016 7,706,021 0 0.00 282,349

 

My God.  Can you actually buy stocks like that as a public fiduciary?