Ship This Name Into Your Portfolio

Freight transport and supply chain logistics company XPO Logistics is in the sweet spot of today's economy. They provide transportation, last mile delivery logistics, less than truckload services and intermodal operations. 2021's EPS of $4.30 established a new all-time record. 2022 and 2023 are expected to build on that. Current estimates were recently raised to $5.22 and $5.65 respectively. Since 2016 profits have exploded higher. Continuous shareholders have to be pleased. Despite that a recent pullback in the shares from north of $153 at the 2021 peak, to about $55, has left the stock reflecting less than half of the firm's EPS growth over that span. The only explanation is that traders have abandoned almost everything to do with transportation on the theory that a possible recession in 2023 might hurt profitability. That goes against common sense and is in opposition to XPO management's own comments. Unsupported assumptions can make for good opportunities. Over the previous six years, XPO never averaged less than 14.8-times earnings. On a forward-looking basis for 2022, the stock has never been as cheaply valued (see green-stars below). At its popularity peaks during 2018 and 2021 (red-starred), the shares fetched about 36-times earnings. My very conservative end of 2022 target price is $78.30, based on just a 15 multiple. Hitting that modest goal would deliver better than 42.3% from today's quote. That appears to be far from an upper limit. XPO gave traders exit points above that during each calendar year since 2017, including 2022 year-to-date. Three of those years saw top ticks of at least $116. All those came with final EPS destined to be lower than what is now projected for 2022. Research house Morningstar calls XPO a 4-star, out of 5, buy. They deign to provide 12-month targets but do let us know what they think is present-day fair value. For XPO that weighs in at $72. Note that XPO fetched almost $80 as recently as March 29 this year and changed hands north of $90 last August. Yahoo Finance is in general agreement regarding XPO's prospects. It calls the shares undervalued and sees it rebounding to over $99 by this time next spring. Value Line thinks EPS can reach $6.50 not later than 2027 and assumes multiple expansion well past my conservative 15-times. Based on that it feels XPO can trade between $125 and $185 by 2027. That implies huge upside potential over time for patient investors. Longer-term thinkers could also benefit via short sales of Jan. 19, 2024 expiration date puts using $50, $55 or $60 strike prices. Actual pricing on those, with XPO at $54.98 on Apr. 19, 2022, is shown below. Worst-case, forced purchase prices dropped to between $41.40 and $46.40 depending on the strike prices employed. The margins of safety are quite generous consider how cheap the stock appears already. In fact, even the most aggressive of those break-even points is below the absolute lows on XPO dating back to October of 2020, in the midst of the Covid-crisis. There you have it. XPO is a fine operator in a business segment that should continue to benefit from the need for supply chain services. Upside potential is large, downside appears quite low. Buy some XPO share, sell some XPO puts or consider doing both.

Ship This Name Into Your Portfolio

XPO logistics is a bargain-priced transportation name that should be in demand. Here's how to invest in it.

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