XPO Logistics is willing to suffer some short-term pain in return for long-term gain, taking a first quarter loss of $2.7 million while planning to complete multiple acquisitions worth $250 million in annual revenue by the end of this year.
The company completed its much-anticipated first acquisition of 2012 on May 8, buying truck freight brokerage Continental Freight Services of Columbia, S.C. XPO snapped up Continental, a $22 million company, for $3.4 million in cash.
XPO plans to more than double Continental’s revenue over time, as the holding company integrates acquisitions and doubles down on organic growth. New truck freight brokerage offices opened in Ann Arbor, Mich., in April and in Dallas on May 1.
“We’ll take a $22 million business and over a couple of years turn it into a $50 million or $70 million business,” said Bradley S. Jacobs, the entrepreneur who became chairman and CEO of XPO last year. “The company has been in business for 32 years and has great relationships with its customers. It can be scaled up a lot.”
Jacobs has a good history of purchasing companies and “scaling them up.”
In 1989, he founded United Waste Systems with an initial investment of $3 million, building the company into the fifth-largest U.S. waste disposal company through more than 200 acquisitions. He sold the publicly owned company in 1997 for $2.2 billion.
He then turned to the highly fragmented equipment rental business, co-founding United Rentals in 1997 and serving as its chairman until 2007. The company grew through acquisitions to become the largest construction equipment rental business in the U.S., with $3.9 billion in sales when Jacobs stepped down in 2007.
Jacobs and his partners invested $150 million in the former Express-1 Expedited Solutions last year as a down payment of sorts on what he envisions will become a multibillion-dollar enterprise in the United Rentals and United Waste model. In February, XPO Logistics raised $137 million in a public stock offering, padding its war chest.
“We’ve got a pretty healthy backlog of acquisition candidates, and we’re primarily looking at truck brokers,” Jacobs told The Journal of Commerce. “Almost all of our top 50 candidates would be truck brokers, with about five in expedited and forwarding.”
XPO also is counting on organic growth, planning on five “cold starts” of new brokerage branch offices this year, and has a new operations center in Charlotte, N.C., where it plans to hire 100 salespeople by year-end.
Last quarter’s $2.7 million loss — XPO’s second consecutive quarterly loss — was not unexpected. XPO has been spending a significant amount of money on organic expansion, hiring a new executive team and rolling out an enterprise-wide technology platform. “The business plan from the start was to have many quarters in a row of losses in the beginning as we invest in infrastructure,” Jacobs said.
On its top line, XPO increased revenue 7.4 percent in the first quarter from a year earlier to $44.6 million, with strong growth at its expedited and brokerage subsidiaries, Express-1 and Bounce Logistics. That compares with a 6.1 percent increase in revenue to $44.1 million in the fourth quarter of 2011. XPO reported a net profit on operations of $759,000 last year on $177.1 million in revenue. In 2010, Express-1 Expedited Solutions had $158 million in revenue and a $4.9 million net profit.
Wall Street hasn’t been daunted by the company’s lower annual profit and two quarterly losses. “We have come around to thinking that Mr. Jacobs just may be on to something,” Stifel Nicolaus transportation analysts said in a note to investors. “Brad Jacobs did his homework by consulting with a vast amount of resources in the asset-light transportation and logistics industry,” the investment research firm said.
BB&T Capital Markets analysts told investors they expect XPO revenue to climb to $257 million in 2012 and nearly $500 million in 2013 and rated the company’s stock as a “buy” even though they expect an annual loss as XPO puts growth before profit.
The analysts also share Jacobs’ assessment that third-party logistics has the potential to grow by leaps and bounds as shippers outsource transportation. “I believe there’s a major underlying trend for shippers and carriers to use 3PLs more and more,” Jacobs said. “Over time, the current 15 percent market penetration rate (of logistics providers and brokers) is going to go up — and way up.”