X-P-Oh my!

Below is a one-year chart for a trucking company. Though it kinda looks like a tech stock. Up nearly 300% from its mid-year low, and up 41% in a matter of weeks.

And all of that without becoming the next big thing in AI or throwing a whole fleet of self-driving rigs onto the highways.

I stake a good bit of my reputation on the idea that you don’t just have to follow what is hot to make oversized, market-beating returns. There are good companies and good investments everywhere, and truly amazing ones sometimes hidden in plain sight.

For the better part of two decades, XPO has been one of those companies. This week, XPO delivered quarterly results that seemed to reintroduce this long-time winner (up 1,000% since inception, plus a couple of spinoffs) to the investment community.

It’s a quarter worth talking about. Especially since, by in large, it has been a pretty lousy quarter for trucking. Worries about inflation and an economic slowdown have caused big customers to scale back inventories and has crimped demand. A lot of really well run companies have missed expectations, and the ones who have beaten have done it mostly with a focus on costs and despite revenue shortfalls.

With that in mind, I present you XPO’s fourth quarter…

• Revenue of $1.94 billion, up 6% vs. last year

• Adjusted EBITDA of $264 million, up 28%

• Operating income up 51%

• Earnings beat by 25%

So, what is going on here? And more importantly, can it sustain?

I’ve discussed the XPO origin story in terms of how it relates to my own origin story. And readers should know I am very biased towards this company, in no small part because of the impact its success has had on my own net worth. But even I’ll admit the XPO history is not without warts.

The company was conceived as an asset-light transportation broker but evolved through dealmaking to have a pretty asset-heavy trucking division. I think it is fair to say the trucking side of the business was not the top priority.

Over the past few years XPO split into three separate companies. To be blunt, at the time of its separation XPO trucking wasn’t really very well run. Complaints were higher than industry standards, completion metrics weren’t great. Costs were high.

The split provided a dedicated management team focused on trucking and trucking alone. I’ve talked to Mario Harik, who was named CEO of the streamlined trucker. He had been with XPO for a decade but his career was mostly in IT, working as chief technology officer or information officer for XPO and before that other industrials.

But who Harik really is is a process-oriented person with an engineer’s brain. His strength is trial and error and evolving based on the results. XPO brought in a couple of key people from Old Dominion, the undisputed leader in the industry, to work on improving operations.

The real numbers from the quarter that long-term investors should note are XPO’s damage claims ratio (0.3%, best in company history), its 40% jump in customer satisfaction, and its 64% jump in service quality. And before you dismiss soft-science scores as garbage, overall customer satisfaction is the best answer I have to the higher revenue in a down market. (It wasn’t price cutting, based on the profitability.) Tonnage was up 2% in the quarter, and XPO handled 6% more shipments per day compared to the last three months of 2022.

XPO’s operating ratio, a measure of how much it costs to generate $1 in revenue, improved by 380 basis points.

To some extent that chart above is the classic “the low hanging fruit is getting picked” chart. You can’t improve operations by 380 basis points indefinitely. But I believe XPO under this management team can sustain the performance levels it reached in 2023, and as it does so continue to grab a significant share of the market without resorting to pricing wars.

And despite the gains, the market arguably still isn’t fully pricing in the transformation. XPO still trades at a substantial discount to Old Dominion, which again has been the best-run company in this business for a generation. The gap (when measure as enterprise value over EBITDA) has shrunk to 6 percentage points, compared to about 10 percentage points a year ago. But it is still a gap.

The path to higher from here is a combination of XPO continuing to find ways to run more efficiently, the company steadily adding incremental market share at the expense of inferior operators, and the market continuing to recognize the quality gap has evaporated.

I’m not predicting another 300% run in 2024. I’m not personally buying or selling. But as a holder of XPO, I continue to see the opportunity for the stock to outperform the broader indexes over time.

That’s a pretty straightforward way to use stocks to get to where you want to be.

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