It appears that hell hath no fury like Amit Mehrotra scorned.
In a phone interview following the note’s publication, Mehrotra said he is convinced the exclusion was deliberate. His belief stems from being around the block for two decades, and gauging a company’s motives through innumerable interactions with its executives.
XPO denied Mehrotra’s claims, saying many analysts, including those typically not called upon, want to participate in XPO’s quarterly calls. It is problematic to include everyone within the limits of a one-hour call, the company said.
Mehrotra has been critical of XPO on several occasions. However, what may have triggered this latest set-to was a January note in which he cited the 17th annual study of LTL shippers by Mastio Research. The most recent study, which canvassed nearly 1,500 customers and was published last November, found that 46% of respondents would recommend XPO while 21% would not. In 2015, when XPO entered the LTL business by buying Con-way Inc., 70% of shippers said they would likely recommend XPO while only 5% said they would not, Mehrotra wrote, citing the Mastio data.
“What’s clear to us from this data is that XPO has seen (a) significant deterioration in trends” since it acquired Con-way, Mehrotra wrote.
Following the acquisition, XPO spent the next couple of years culling marginally profitable or unprofitable freight. XPO lost tonnage and revenue but wanted to maintain a high return on invested capital, Mehrotra said. To do that, it underinvested in equipment and infrastructure, moves that didn’t sit well with sophisticated LTL shippers, Mehrotra said.
During that time, XPO’s rivals expanded their footprints and service capabilities to offer shippers superior value propositions, he said. Shippers willing to pay a premium for high-quality service responded in kind, he said.
Mehrotra has been known to get aggressive and confrontational on analyst calls, as he has done at times on XPO calls. His goal, he said, is not to anger or embarrass a company, but to guide his clients toward optimal investment outcomes by forcing top executives to respond to difficult questions. Mehrotra rarely, if ever, has been denied an opportunity to query companies.
Strong Q1 results
His comments came as the Greenwich, Connecticut-based company basked in the glow of first-quarter results that exceeded analysts’ estimates across the board and that led to a slew of positive comments and share price upgrades. XPO reported $1.25 per share in adjusted diluted earnings, well above the 93- to 94-cents-a-share median estimates from various sites. Adjusted earnings before interest, taxes, depreciation and amortization, a measure favored by XPO, rose to $321 million from $279 million. Operating income nearly quintupled to $625 million. Revenue rose to a record $3.47 billion from $2.99 billion, XPO said. The company raised its full-year adjusted EBITDA outlook to between $1.35 and $1.39 a share from $1.36 to $1.40 a share. The revised estimates don’t include $60 million in projected nine-month EBITDA from its intermodal business, which was sold at the end of March to STG Logistics for $710 million in cash.
The truck brokerage business, which has been firing on all cylinders for months, posted a 38% increase in revenue on a 23% increase in loads. Net revenue, which is revenue minus the cost of transportation and services, increased 21% to $134 million. The LTL unit generated $1.1 billion in revenue, up from $862 million in the 2021 quarter. Operating income fell $13 million to $132 million, while the unit’s operating ratio, defined as the ratio of revenues versus expenses, came in at 85.7%, an unfavorable 140 basis point year-over-year increase but better than the 200-basis-point increase originally projected. The company’s elevated use of expensive purchased transportation remained a problem, though executives expect the cost headwinds to abate through the rest of the year due to more favorable contractual terms.
Mehrotra, who has remained an XPO bull, said he is keeping his 12-month price target of $120 a share, though fears of a recession make that number subject to change. Shares closed Tuesday at $53.08, up slightly more than 4%.
Mehrotra said in the interview that the LTL unit’s issues are fixable. A five-point program outlined in January, which includes a 6% increase in the number of dock doors by the end of 2023, improving network flow with “targeted initiatives,” increased trailer count and doubling the number of driver graduates, are steps in the right direction, he said.
However, XPO has a multiyear service hole to dig out of, and it faces formidable competitors not waiting around for that to happen, he said. For example, Old Dominion and Saia will add as many doors by the end of this year as XPO adds in two years, Mehrotra said in the interview.
XPO shares, which traded at near $90 a share in mid-August, had fallen to just above $50 a share before Tuesday’s bump. The decline, according to Mehrotra, reflects the market’s ability to efficiently price in the challenges facing the company’s LTL operations.
