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The Next Big Thing in E-Commerce Hits Wall Street Next Month

XPO Logistics (NYSE: XPO) has set the date for its long-awaited split, announcing GXO Logistics will begin trading on August 2.

The split is a huge moment in the history of one of the transportation sector's top performing stocks this century, and it should create some intriguing opportunities. Although investors don't often focus on logistics when it comes to e-commerce, I believe GXO is one of the best ways to invest in the expected growth of online and omnichannel shopping.

Here's why investors should be paying close attention as GXO splits off from XPO.

Meet GXO Logistics

GXO is a provider of contract logistics, running warehouses and managing deliveries and returns for retailers, e-commerce merchants, and other large companies. GXO has set itself up as the answer to one of the biggest challenges retailers face when competing with Amazon.com. Few companies have the scale to match Amazon's shipping and warehousing heft on their own, but combined, under the management of GXO, merchants can get the sort of economies of scale that Amazon uses to its advantage.

GXO, in short, is the behind-the-scenes machinery that makes e-commerce work. The stock allows investors to benefit from the expected continued growth in e-commerce without having to pick winners and losers among individual retail stocks.

Image source: XPO Logistics.

The company has other huge tailwinds at its back. GXO should benefit from a pre-pandemic trend toward large companies outsourcing their logistics operation that has only gained urgency due to COVID, and from the efficiencies that come through warehouse automation. XPO had been spending $500 million annually on tech prior to the split, and much of that has gone into automation.

GXO operates from 885 locations, primarily in North America and Europe, and counts blue chip companies including Apple, Nike, Walt Disney, Nestle, Pepsico, and Whirlpool among its customers. Its twenty largest customers have been doing business with the new GXO for an average of 15 years, and no one customer accounts for more than 4% of total revenue.

Company officials expect to generate 17% adjusted EBITDA growth and 10% revenue growth through 2022. Today about 40% of its revenue comes from pure-play e-commerce and omnichannel retailers, and the company said it has a $2 billion pipeline of new potential business on the horizon.

GXO is one of the largest pure-play contract logistics companies operating worldwide, but it still has a lot of growth potential. The company generated $6.6 billion in revenue in the last twelve months, a small piece of a $130 billion addressable market of outsourced logistics. Add in-house logistics, some of which is likely to be outsourced in the years to come, and the entire North American and European potential market is more than $430 billion.

The trucking business is ready to hit the fast lane

Terms of the split call for XPO holders as of July 23 to receive one share of GXO stock for every share they own. The remaining XPO, while not as sexy as the e-commerce focused business, also has the potential to outperform.

The "new" XPO will be comprised of the current company's transportation segment, which generated more than $10 billion in revenue over the past twelve months. It ranks as the third largest provider of less-than-truckload (LTL) services in North America, the complicated business of operating trucks for multiple customers instead of filling a truck with goods from one customer. It is also the largest truck brokerage in North America, and a top provider of last mile logistics, and has a large European operation as well.

Part of the rationale behind the split was to reshuffle debt and leave this trucking business with an investment-grade rating and a lot of flexibility. XPO was built on acquisitions, growing revenue by 17,000% during a 10-year period ending in 2015, and propelling the stock into one of the market's best performers over the last fifteen years. Post-split the remaining XPO will have the flexibility, and the balance sheet, to once again look at both organic and inorganic expansion opportunities.

XPO data by YCharts

Two stocks with great potential

I've long been a fan of XPO, impressed by the work of rollup specialist Brad Jacobs as he first assembled and then managed this transportation behemoth. But the market hasn't been nearly as enthused of late, with XPO shares trailing the S&P 500 by more than 10 percentage points over the last three years.

The split is designed to rekindle Wall Street's interest in XPO, and remove the so-called "conglomerate discount" by giving investors two more focused, pure-play companies to consider. XPO today trades at an enterprise value about 11 times expected EBITDA.

The hope is that post-split the trucking business can command a valuation similar to rival Old Dominion Freight Line's 19 times forward EBITDA multiple, and GXO will trade at a multiple closer to the 17x that European pure-play contract logistics businesses have sold for or at least C.H. Robinson Worldwide's 13x valuation.

Jacobs is hanging around, intending to remain as CEO of XPO while taking the added title of chairman of GXO's board. This is still a founder-owned business, with Jacobs owning about 13% of XPO shares.

XPO's stock hasn't performed of late, but this is still an impressive collection of assets with clear growth trajectories. It is unlikely either of these stocks have a run that matches XPO's growth over the last decade, but both of these businesses are set up well to be outperformers for years to come. Current XPO shareholders should continue on for a ride, and as of August new investors will have both an e-commerce specialist and a trucker to consider.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Lou Whiteman owns shares of Walt Disney and XPO Logistics. The Motley Fool owns shares of and recommends Amazon, Apple, Nike, Old Dominion Freight Line, and Walt Disney. The Motley Fool recommends C.H. Robinson Worldwide, Nestle, and XPO Logistics and recommends the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.


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