December 27, 2017

XPO shares climb to another record high after Citigroup analyst upgrade

Hike in price target to $110 a share from $75 stirs Home Depot, Amazon buyout pot some more.

By Mark B. Solomon

Just five days after its share price soared to an all-time high amid takeover rumors, shares in transport and logistics giant XPO Logistics Inc. resumed their upward march today after a Citigroup analyst set a $110-per-share price target on the stock, largely based on the company's increasing potential as a takeover target.

Shares in Greenwich, Conn.-based XPO closed at an all-time high of $92.17, up $3.144 a share, a day after the Citi analyst, Christian Wetherbee, hiked his price target on the shares to $110 a share from $75. Wetherbee added that XPO shares could climb as high as $120 a share in the event of a buyout, according to published reports. According to the reports, Wetherbee said that XPO has long been rumored to be a takeover target, and that Brad Jacobs, XPO's founder, chairman, and CEO, would be interested in pursuing a buyout offer if the price was right.

XPO shares soared more than $11 a share on Friday after technology website Recode reported that home improvement giant Home Depot Inc. had internal discussions about making a bid to acquire XPO so that e-tailing giant Inc. could not. The report said that Home Depot believes Amazon has been eyeing XPO, a rumor that has made the rounds for at least a couple of years. XPO has declined comment, while Home Depot has been unavailable to comment.

John G. Larkin, transport analyst for investment firm Stifel and a long-time XPO bull, downplayed the rumors. "XPO is still a work in process, and not all the pieces fit Home Depot's logistics strategy," Larkin said yesterday in an email, without elaborating. XPO has amassed $8 billion for the publicly stated purpose of making acquisitions, and Larkin surmised that Jacobs would want to put those funds to work before embarking on an exit strategy. XPO grew from virtually nothing in 2011 to a $15 billion company today largely on the back of a spree of acquisitions and integrations considered unprecedented in magnitude for the transport and logistics sector.

The financial publication Barron's, in its online edition yesterday, cited comments from financial firm Oppenheimer & Co. Inc. that the firm would be "hard-pressed to see (Home Depot) purchasing a transportation and logistics firm the size and scope of XPO." Home Depot would be most interested in acquiring XPO's "Last Mile" business, which accounts for 6 percent of XPO's total 2017 estimated revenue, according to Scott Schneeberger, an Oppenheimer analyst who follows XPO. Buying all of XPO would propel Home Depot "into entirely different lines of business," Barron's quoted Schneeberger as saying.

Acquiring a company just to keep it away from another might not be the most prudent rationale to justify the costs of acquisition and integration. However, all bets seem to be off these days when it comes to coping with Amazon, the Seattle-based company that is putting pressure on all types of retailers and wholesalers—Home Depot included—by offering a massive online storefront supported by a robust fulfillment and delivery model executed at a very competitive cost. Companies that span multiple verticals are struggling to respond to Amazon's growing power, and its influence, which is rippling across the national commerce landscape, has given rise to the term "The Amazon Effect."

The price of admission to this high-stakes game is having a strong last-, or final-mile, delivery service such as XPO's. The company jumped into the last-mile segment in 2013 when it acquired Marietta, Ga.-based 3PD Inc., a highly respected provider. Over time, XPO has refined and expanded its last-mile capabilities. The company said in September that it plans to nearly double its current last-mile delivery network to 85 service hubs by the end of next year. In May, XPO said it was working to connect its contract logistics, less-than-truckload (LTL), and last-mile operations to support the last-mile movement of heavy goods ordered online. Demand for last-mile deliveries of non-parcel shipments is expected to soar in coming years as manufacturers and retailers open up more of their products to online ordering.

Atlanta-based Home Depot and XPO have a long history, and at the center of the narrative is Karl Meyer, who in 2001 co-founded 3PD after spending five years at Home Depot as national delivery manager. During his tenure at Home Depot, he convinced top executives to transition their home delivery services to an outsourced from an in-house model. Once 3PD started up, Home Depot became its first customer. After XPO acquired 3PD, Meyer joined XPO to run its last-mile operation, a position he still holds.

At the same time, Amazon has reached out to XPO for potential partnerships. Amazon, which said in June it would enter the furniture business, is reportedly considering XPO as its primary delivery provider.

This story has been updated to include comments from the Oppenheimer analyst.

About the Author

Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

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