XPO Earnings: Share Gains From Failed Yellow Offset Soft Underlying Demand; Margins Impressive

XPO’s third-quarter organic top-line trend swung positive year over year, rising 2%—much better than the 6% decline last quarter thanks to LTL shipment diversions from bankrupt peer Yellow. We’ve already been baking in a meaningful sequential uptick in LTL volume and pricing, but revenue modestly beat our forecast on strong yields. XPO’s flagship LTL top line rose 2%, versus an 8% second-quarter decline. European trucking segment revenue grew 1.5%, likely driven by lingering pricing strength.

LTL tonnage rose 3% and was up 3% sequentially (ahead of normal seasonality). Underlying freight demand across the trucking landscape is still facing muted retailer restocking and sluggish industrial end markets, but Yellow diversions have provided a strong offset for many carriers. It also sounds like XPO is gaining incremental new business due to service improvement such as better cargo claims.

Core yield (excluding fuel) jumped 6%—ahead of the 1% average increase posted during first half of the year—driven by pricing discipline and given that Yellow’s failure removed almost 10% of LTL industry capacity, thus tightening up the supply/demand equation and boosting most carriers’ pricing power.

Following second-quarter results, we expect to raise our $48 fair value estimate by 4%-6% as we give XPO slightly more credit for LTL operating ratio, or OR, gains from greater lane density in the years ahead. In terms of valuation, recall that LTL stocks surged throughout the summer months on a wave of optimism over pricing and volume benefits from Yellow’s bankruptcy. In our view, the shares look rich relative to our longer-term free cash flow growth assumptions—a common theme for peers Old Dominion and Saia, as well.