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Krause Fund Research

Fall 2018

Industrials Recommendation: BUY

Analysts

Drew Rasmussen Andrew Straight

andrew-rasmussen@uiowa.edu andrew-straight@uiowa.edu

Erik Miller Joseph Tomczuk

erik-miller@uiowa.edu Joseph-tomczuk@uiowa.edu

Company Overview XPO Logistics, Inc. (NYSE: XPO) operates in the transportation and logistics industry in the United States, Europe and Asia. XPO is the fastest growing company in its industry. They operate about 63% of their business in the transportation segment and about 37% of business in the logistics segment. XPO has put an immense amount of focus on increasing their share in the logistics segment of their business model. XPO’s total revenues grew 5% in fiscal year 2017 to $15.543 billion, and pre-tax income grew 144% to $260 million in 2017.

Stock Performance Highlights 52 week High $116.27 52 week Low $71.36 Beta Value 1.826 Average Daily Volume 1.36 m

Share Highlights Market Capitalization $9.96 b Shares Outstanding 114.9 m Book Value per share $32.63 EPS (FY 2017) $0.87 P/E Ratio 21.40 Preferred Dividend Yield 4.00%

Company Performance Highlights ROA 2.80% ROE 11.20% Sales $15.54 b

Financial Ratios Current Ratio 1.20 Debt to Equity 1.13

XPO Logistics, Inc. (NYSE: XPO)

November 9, 2018

Current Price $81.03

Target Price $91 - $97

XPO’s Future is Bright

• Revenue growth in both the transportation and logistics segment show major upside in the future: XPO’s revenue has major upside potential in the future, projecting to grow 10% in 2018. They have put an immense amount of focus into growing last mile services in North America as well as expanding last mile services into Europe. They are also the number one provider of large truckload services in Europe. The Logistics segment is looking to have major growth as they take advantage of increasing world-wide e-commerce growth, and a focus on being a one stop shop for their customers providing both transportation and logistical services.

• Focus on technology and innovation gives XPO a competitive advantage over competition: One of XPO’s top corporate strategies is to be the leader in their industry of technology development and innovation. They plan to invest over $450 million towards technology in 2018. Robots and artificial intelligence have already become a part of everyday operations.

• Brand Image and market position creates major upside potential: XPO is among the top transportation and logistics providers in North America and Europe. In a tightening worker supply environment, they have still received over 80,000 monthly job applications this year.

• Abundance of FCF creates potential for M&A activity as well as support in a recession: XPO is on track to have a cumulative FCF of $1 billion from 2017-2018. This allows for a cushion in the case of a recession as well as potential for future M&A activity.

• E-commerce growth allows for tremendous logistics upside: E-commerce customers account for XPO’s largest portion of revenue. E-commerce is projected to grow at a CAGR of 9.6% from 2018 – 2022.

One Year Stock Performance

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Economic Outlook

Real Gross Domestic Product (GDP)

Real gross domestic product (GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year. Real GDP is widely recognized as a leading indicator of economy growth. Unlike nominal GDP, real GDP accounts for fluctuations in price level and delivers a more precise figure of economic growth.

Strong GDP growth over the past year and a half has spurred new investment opportunities, increased consumer confidence, and dropped unemployment to record lows within the U.S economy. Even with equity markets recently experiencing some unsettling volatility, fundamentals of the economy remain strong with GDP growth north of 4% and 3% in Q2 & Q3 2018 respectively. The Industrials sector is very cyclical and especially sensitive to changes in the overall market. The Industrial Production Index (IPI) measures the real production output of manufacturing, mining, and utilities; demonstrating the overall health of the Industrials sector. Historically, growth in the IPI has had a positive correlation with real GDP growth.

Real Gross Domestic Product Outlook

We anticipate Real GDP to increase by 3.0% and 3.25% in the short and long-run, respectively. This is a reflection of the strong fundamental drivers in the market in addition to recent external factors mitigating potential risk looking forward. Current employment data supports our hypothesis

with the unemployment rate approaching record lows of 3.7%, paired with an increasing labor force participation rate. It is no surprise that economic growth and development is a pillar of the current Trump administration policy. Over 2 million jobs were created in 2017 alone, and the implementation of the Tax Cuts and Jobs Act of 2017 reinforce commitment to a continuous improvement of the U.S economy. We project that trade uncertainties and inconsistencies within the market will fade over the long run. Long term growth will be a byproduct of the foundation built over the last few years and optimistic workforce that’s reflected through the increasing labor force participation rate and record high consumer confidence levels. This strong growth bodes well for the Industrials sector overall because the Industrial production output has a positive correlation with the market performance.

Interest Rates

Interest rates are one of the most important aspects of an economy, influencing many decisions including borrowing and expected return on investments1. Interest rates are influential in an economy to promote or cool down growth

because of its direct impact on the cost of borrowing. The U.S has experienced a record low interest rate environment the previous 10 years due to an attempt to promote growth and expansion within the economy post-great recession14. In 2018 alone, the Federal Funds Rate (FFR) increased three times to a current benchmark of 2-2.25%, with current signals pointing towards a fourth increase of 25 basis points before year end14. Changes in the FFR have a primarily direct relationship with the 10 year Treasury note, which is commonly used as the risk-free-rate for borrowing when analyzing different investment opportunities.

Due to the nature of business and material & equipment utilized within the Industrials Sector, companies rely heavily on borrowing to fund much of their capital expenditures. The Fed has been relatively transparent about their plan of gradually increasing rates until a neutral level—which Fed Chair Jerome Powell has mentioned are not near a neutral level, yet. While President Trump has been vocal about his personal negative view on the potential for continued future

Source: St. Louis Federal Reserve

Source: Bureau of Economic Analysis

Source: St. Louis Federal Reserve

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rate hikes, the Fed does not show any sign of altering their stance going forward. We project that rates will increase once more in 2018, and three times in 2019 because of continued strong fundamentals and growth in the economy. While some may interpret interest rates increasing as a negative, we recognize that it is necessary to offset potential inflation and other adverse effects of a thriving economy. We believe that markets have already included these future rate hikes into valuation, and that future overall capital expenditures will not decrease dramatically.

Consumer Confidence

Consumer confidence is another key indicator of the state of the economy because it is based on consumers’ thoughts on the current and future state of the economy. Industrial production has historically been highly correlated with consumer confidence. When people feel better about the economy, the more they feel they can spend on industrial goods and products. There are two ways of analyzing the consumer confidence level: The Consumer Confidence Index (CCI) and the Michigan Consumer Sentiment Index (MSCI). The Consumer Confidence Index is conducted by surveying 5,000 households by the Conference Board. The CCI is based on benchmark score of 100 from the year 1985. As of October 2018, the CCI stands at 137.9, the highest score of all time2. The Michigan Consumer Sentiment Index is conducted by the University of Michigan through a survey of 500 households, a very similar process to the CCI. The MSCI reflects roughly the same data as the CCI and accounts for outliers by removing the most and least favorable replies. The graph below depicts the MSCI, and similarly to the CCI, the index is near all-time highs.

Source: St. Louis Federal Reserve

We can expect consumer confidence to remain high due to a large degree of optimism surround the soaring markets. While some believe that a market correction will occur in the near future, the recent consumer confidence index surveys have displayed no sign of this, proving consumers’ optimistic approach—this forward confidence is a key driver for our

future growth projections. We believe that because consumers have weathered equity market volatility and political uncertainty the past two years with very little impact on consumer confidence, this outlook remains strong.

Tax Considerations

In December of 2017, the Tax Cuts and Job Acts (TJCA) was signed into law and has become the largest tax overhaul since 1986. The TCJA has introduced a number of changes to the way that business are taxed. In one of the largest changes, the TCJA will reduce the business sector’s tax liability by the changing of business tax rates and the business tax base.

In the short run, GDP is projected to grow roughly 0.44% above baseline projections as firms utilize the immediate expensing of short-lived assets and lower tax rates1. This looks to promote capital expenditures, which promotes economic growth. This accelerated initial growth will likely reduce in a few years due to the temporary nature of many of the provisions. However, while economic growth is borrowed from the future, the plan still expects economic growth to surge over the long-run. Beyond the first decade, the plan aims to broaden both income and payroll tax base to make up for revenue shortfall and cover the cost of the plan. In the end, this new tax policy will affect the economy in a few different ways: shifting demand for goods & services, changing budget deficits, and affecting incentives to work, save, and invest. We see this as yet another positive sign for the economy, and contributing to strong GDP growth looking forward.

Fuel Prices Fuel and oil prices are key factors in the economy and especially the Industrials sector, due to the impact that fuel has on both manufacturing and production costs. The lower the price of oil, the lower the cost of manufacturing goods,

Source: Tax Foundation, Taxes and Growth Model, Nov 2017

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Industry Analysis

which in turn will improve a companies’ overall profit margins. A lower oil price also results in lower gas prices which lead to consumers spending more on goods and services instead of gas. While oil prices have remained fairly steady over the last few years, barrel prices have started to see a slight increase. In 2018, the barrel price of WTI crude oil has remained within a $60-$72 range and is currently priced at $60.19 per barrel.

Source: St. Louis Federal Reserve

The graph above also shows what some researchers believe, that crude oil will soon return to its historical average price of $75-$100 a barrel, despite reaching a low price of $26.55 in 2016. In the short-run this will put pressure on the Transportation industry, but we do not believe it will have a significant impact because prices will just be reverting back to their “normal” level; the last two years have acted as a bonus for the industry. Due to factors such as oil supply, natural disasters, and other world events however, oil prices could rise exponentially within the next 20-50 years, especially due to supply shortages. This uncertainty poses a major threat to companies that rely on oil, but we are starting to see a shift in company expenditure allocation towards research & development within the Industrials Sector. Both XPO Logistics and The Boeing Company have put forth efforts to increase their fuel capacity through more environmentally safe and efficient products and improvements which will help both the bottom line and environment. It is the dedication to innovation and development that has launched XPO to become an industry leader within this space, and we expect that commitment to continue to pay off in the future.

Capital Markets Outlook

Based on the information above and current economic conditions, we believe that the future capital markets outlook is positive. The U.S economy has taken advantage of opportunities such as new tax laws, increased governmental spending and record high consumer confidence that are contributing towards a strong and stable GDP growth. Potential trade conflict and inflation may pose threats in the future. With that being said, the Fed has followed through on their commitment to carefully monitor interest rates and taking appropriate action to mitigate the economy

overheating when necessary. The Trump Administration is approaching trade negotiations with a different attitude and technique than past leaders. We believe that while this may have caused a potential negative effect on certain areas of the economy in the past, those behaviors have not and will not lead to long-term disaster. We also believe that the recent midterm election result of a split congress and senate will mitigate future unexpected volatility that may have occurred the last two years due to this. The certainty in knowing that extreme policy will not be put forward into action will provide stability to the markets and hold consumer confidence levels at record highs.

Industry Description

XPO Logistics operates as a leader in the Transportation & Logistics industry. Transportation comprises roughly 63% of XPO’s revenue with a focus in freight brokerage, last mile, less-than-truckload (LTL), full truckload and global forwarding services. XPO has committed to having a global presence in their transportation operations, currently working in over 30 countries. Transportation as an industry primarily follows the overall economy in terms of performance and growth. Logistics makes up the remaining 37% of revenue for XPO in which they provide a wide range of contract logistics services and other inventory solutions. As of 2017, Transportation and Logistics jobs comprised roughly 2.3% of all U.S jobs, with favorable growth estimates looking into the future.

Recent Developments and Industry Trends There is much optimism within Transportation & Logistics due to strong international demand paired with many exciting innovation opportunities. From 2008-2017, the T&L industry boasted a 12.7% growth rate and created over 416,316 jobs, surpassing the overall economy growth rate of 5%6. The Transportation & Logistics industry is expected to carry this momentum forward, projecting an 8% growth rate and creating roughly 280,000 more jobs through 202212. This optimism is derived from the ability to cover more miles at a lower cost and the potential for innovative technologies allowing expansive capabilities for companies currently operating in this space. These future opportunities, primarily driven by Third Party Logistics, seemingly mitigate the negative effects that have come forward recently with increased driver regulatory requirements, environmental awareness initiatives and wage pressure from low unemployment.

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Trends:

Unemployment- Wage Pressure

The unemployment rate is generally viewed as a laggard representation of overall economic health. With help from over 2 million jobs created in 2017, the current 3.7% unemployment rate is approaching a record low level for this past half-century. This paired with an increasing labor force participation rate demonstrates that the strength of the U.S economy is very strong.

However, while this can certainly bring optimism and reassurance for representing a strong underlying economy, concerns may arise over some of the negative effects that low unemployment may have. Low unemployment over an extended period of time poses the risk of inflated wages. Increasing wages throughout the economic universe is a threat to the Industrials sector as employees are fleeing to less labor-intensive jobs that now have comparable compensation packages in other areas. While XPO Logistics has been experiencing over 80,000 job applications per month globally, the same is not being reflected throughout the industry. It is no secret that there is a record level Trucker shortage, estimating over a 50,000 driver deficit7. To make matters worse, the American Trucking Association predicts that 890,000 new drivers will be needed through 2025 to meet rising demand. In order to attract and retain top talent in a limited pool of candidates that have easier accessibility to flee the industry, companies raise wages to ensure stability in their workforce. As recently as last October, Amazon pledged to raise their minimum wage to $15/hr, and with additional hopes to “encourage major competitors to do the same5”. 2016 average earnings for a worker in the T&L industry fell just below $70,000. The sustainability for many small-cap firms to accommodate these costs and wage increases in addition to difficulty finding new employees does not forecast well. XPO has positioned themselves very competitively in the market through great brand marketing and recruiting efforts, they

are on pace for over a million job applications this year. Because of this reflection of a strong brand image, we do not believe that wage inflation will have a significant impact on the overall operations at XPO. Increased Trucking Requirements- Safety

The Compliance, Safety and Accountability Initiative (CSA) was introduced into the Trucking industry to prevent and reduce road accidents and risks of incidents for truckers. The CSA utilizes seven categories to prioritize carriers for possible interference: Unsafe Driving, Crash Indicator, Hours-of-Service Compliance, Vehicle Maintenance, Controlled Substances/Alcohol, Hazardous Materials Compliance, and Driver Fitness. Within the last 5 years there have been modifications to the CSA that primarily involve increasing regulatory requirements and altering work hours13. The first two proposals involved stricter requirements for both the operator and the vehicle itself. In order to push safety standards, the FMSCA proposed new driver training requirements for both current and new employees to retain and obtain licenses. The results of these accreditation standards remain to be seen. The subsequent proposal involves green-house gas emission regulations. The EPA and Department of Transportation’s National Highway Traffic Safety Administration have joined together to set emissions and fuel efficiency standards for commercial trucks. By 2021, the hope is to eliminate fuel inefficient models13. The last proposal mandated that an employee must be required to satisfy a 34-hour break upon driving 73 hours in a 7-8 day span13. In order to satisfy the requirements of the proposal with congestion of longer drive times and restricted work hours has shifted a greater emphasis towards Logistics. The combination of these initiatives are a part of a progressive approach towards increasing safety on the roads, and doing so in a more environmentally friendly way. Technology- Big Data, Changing Demands

Technology and innovation have dramatically altered the way the world works, especially in regards to consumer demands. Consumers want things faster, and don’t want to pay more for it. Consumers also want transparency in the delivery process. Whether it’s checking the status of their goods, controlling delivery location or timing, shipping has become more complex and with a higher demand. In the past, a single truck would move a large load from distribution to the retail center. Now, the same volume of goods may travel last mile on numerous trucks that could be half full, but rapidly decreasing the overall delivery time to the consumer. These increasing demands and expectations have evolved to “Industry 4.0”. Industry 4.0 is a term used to describe the newest technological advancements in

Source: Econoday

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manufacturing where a majority of parts of the supply chain system are digitally unified. This interconnection allows for more efficient products that are made less expensively, and with improved quality16. Improvements to technology have also paved the way for Big Data. Big Data is being utilized in the T&L industry to find ways of how to serve the customer better, and how to improve internal operations better. Data research, analysis, and development have become a major emphasis for top competitors in the industry. XPO Logistics positions themselves well as they contribute north of $450 million per year on data research and development. Understanding routing optimization, fleet management, equipment wear, and employee driving styles/behavior are some of the ways XPO and other companies look to gain an advantage through big data. We see technology and innovation as being the primary contributor to a company’s success within the industry. It is absolutely essential to meet consumer demand, the companies that go about it the most efficient and effective way will remain competitive.

Catalysts for Investment

E-Commerce, Freight Transportation Growth

Ecommerce:

Transportation & Logistics is in the center of a transitioning environment. E-commerce sales in the global economy have experienced superior growth and look to continue to grow at an increasing share of overall retail sales. Over the next 5 years, E-commerce sales are projected to increase at an annualized rate of 13.4%12. This is a core foundational pillar for optimism within the T&L industry—many projections for industry growth are reliant on a continued strong E-commerce development.

In a time where globalization is becoming more accepted and trade continues to expand overseas, the East Asia-Pacific region has emerged as a primary driver of e-commerce sales. Retail e-commerce sales in East Asia-Pacific grew 31.1% in 2017 to $1.349 trillion12. This growth does not show any

indication of slowing down with the onset of India displaying promising e-commerce sales and development. The increase in e-commerce sales has contributed to a greater demand for last-mile shipping, in which third-party logistics companies primarily coordinate the process. This is an example of the power of e-commerce and how it directly

impacts both transportation and logistics companies positively. XPO Logistics benefits from this situation because they provide both logistical and last-mile transportation services for consumers. There is much anticipation that transportation companies will have to develop a stronger logistics line of business, or will have to start outsourcing their transportation logistical operations onto third-party logistics providers as they try to simplify their supply chain and focus their core business. Freight Transportation:

The Cass Freight index report is a measure of domestic

freight volume and expenses. The index currently includes

$25 billion on in freight transactions. The most recent report,

July 2018, shows an 8.4% year over year change in shipment

volume15.

This is an important index because it shows the overall

freight shipment levels in the U.S. Not only is this a good

economic indicator, but it provides validity for the

Transportation industry as a whole, with data to support

growth or stagnation in this line of business. Freight

Source: CBRE

Source: IBIS World – Third Party Logistics productivity

Source: Cassinfo.com

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Transportation growth has been an area of opportunity for

many companies within this industry. The East Asia-Pacific

region contributed towards a major push within freight

transportation, increasing airline freight volumes nearly 8%

in 201712. In Europe, carriers experienced a 10.5% increase

in freight demand in January 2018 year over year. There is

continued optimism looking forward. In a 2023 forecast, the

American Trucking Association projects that revenue in

freight transportation will grow 59%. XPO is positioned very

well to capitalize on this opportunity. North American

brokerage revenue grew 18% in part to the new

development of XPO Connect19. XPO has also executed on

last-mile delivery services in Europe to catch some of the

growth in the global market.

Markets and Competition Environment:

XPO positions itself as a one stop shop providing exceptional quality service to exceed the needs and demands of their customers. They are heavily invested in both transportation and logistics segments of the business. XPO boasts and frames themselves as a technology leader, allowing them to utilize an immense variety of capabilities and resources to solve very big and complex logistical implementations. Most of the competitors in this market are specialized to just one or a couple avenues within the respective industries, which puts XPO at a competitive advantage for the consumer. Competition:

Mix strategy has taken the lead for what consumers are looking for in the transportation & logistics industry. As described above, consumers are expecting greater customer service, quicker delivery times, all at a lower cost. XPO is already ahead of this trend because they not only offer both services, but are industry leaders in both. As the relationship

between transportation and logistics continues to become even stronger, other companies are going to have to branch

out from their specialized service in order to remain competitive16.

C.H Robinson:

C.H Robinson is one of the largest third-party logistics companies in the world, providing freight transportation and logistics solutions to all sizes, and a wide variety of industries. They have put a large emphasis on global expansion in recent years to get ahead of competition. C.H Robinson plays as the best comparable to XPO. They operate in very similar areas and have relatively similar fundamental ratios. They have very similar business models, each capitalizing on both transportation and logistics services while placing a great emphasis on investing in research and development for premier technology. Fundamentally speaking, C.H Robinson has been able to achieve a greater market share than XPO while earning a more efficient EPS and greater net Income—with nearly one-fourth of the debt level. C.H Robinson is clearly in the mature phase of operations and has been available in the public equity market since 1997 (14 years longer than XPO). Landstar Systems:

An asset-light provider of integrated transportation management solutions, Landstar Systems operates in the Transportation, Logistics, and Insurance segments. Transportation services offered are primarily located in North America. The insurance segment consists of Signature Insurance Company, which is an offshore insurance subsidiary, and Risk Management Claim Services, Inc. Landstar Systems does not have the global reach that XPO currently has, and that is evident by overall revenues. Landstar Systems has strong free cash flow and capitalizes on their brokerage services through strong employee development. Costs are expected to increase, as Landstar is committing towards a greater technology investment development program over the next few years to spur growth and accessibility to new markets. Landstar Systems has been available in the public equity market since 2005 (6 years longer than XPO).

J.B Hunt:

A highly regarded surface transportation, delivery, and logistics company that provides services in the U.S, Canada,

Source: Masters of Logistics

Source: Yahoo! Finance

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and Mexico. J.B Hunt’s tailored approach to its customers hasn’t gone unnoticed, earning a Top 10 ranking for Third-Party Logistics providers for a ninth consecutive year. J.B Hunt consistently produces strong quarterly results, with a greater market share, higher EPS, and about half of the debt compared to XPO. Expense ratios are also more efficient. Total revenues are almost half of XPO’s but follow with a net income that is three times larger. J.B Hunt is focusing on price strategy over the next 6 months to a year, to continue their competitive advantage in an ever-changing environment. The Amazon effect:

It was mentioned earlier how Amazon’s increased minimum wage is putting pressure on the Industrials sector. Not only is Amazon effecting the whole industry indirectly, their recent plans to enter into the transportation & logistics space serves as a threat to current companies. Amazon currently has 258 operational facilities in the United States, and another 486 distributed world-wide. They also have 32 Boeing 767-300s, in addition to north of 300 power units3. While these numbers would not currently support a giant in the industry, Amazon has the capital to grow these areas when/if focused upon. The concern of entry is legitimate, as steps are being made to jumpstart this agenda: According to the Amazon careers page, currently 5% of their workforce is dedicated to transportation and logistics jobs across 23 countries3. Job opening descriptions are tailored towards experienced professionals within the industry, specifically air shipping—attracting talent from current competition. Forward-thinking innovative ideas/products have also surfaced regarding Amazon’s potential to break into the industry. Such services include drone delivery, Amazon lockers, remote door access, and more. It not a question of if, but of when, Amazon will fully dedicate to entering the industry, and what impact that will have on current companies.

Analysis:

XPO faces threats from the competitors above, as they continue to expand in both industries to keep up with customer demand. The recent trend above reported in the 26th annual study of Logistics and Transportation shows how competitive it will be to obtain and hold market share. XPO’s competition primarily focuses on CH Robinson, and J.B. Hunt Transport Services11. They all relatively share the same business model and expansion aspirations, in addition to similar Market Cap. One might assume during an eye test that XPO does not have as strong fundamentals with Net Income levels less than half of the competition, and Total Debt currently at a similar multiple. This is not of concern to us due to the fact that XPO is still a relatively new company and is completing the growth phase of their life cycle. XPO’s

revenue number continues to impress, and from the degree of how fast they became an industry leader, we have confidence in management to continue making great investment decisions going forward. S&P & Moody’s credit agencies both upgraded XPO’s credit rating to BB and Ba2 scores. This vote of confidence comes from XPO’s consistent strong financials, forward thinking investment initiatives, and their commitment to paying down debt. Paying off debt has been a major point of emphasis expressed by management. XPO currently has the lowest EPS and highest P/E ratio in the comparable group, and is higher than the average 16.63 ratio for the industry. This could be an indicator that the stock is overvalued, due to the differences. When thinking about these three comparable companies, we have to remember how XPO provides more services to the customer, acting as a one-stop-shop for both Transportation & Logistics services. They are ahead of the curve for Mix strategy, which is important when thinking long-term in this competitive space. J.B Hunt does not have the same global reach, nor does C.H. Robinson provide the same amount of capabilities that XPO does. As these competitors focus on growth in those respective areas, XPO can remain attentive towards meeting customers’ demands, servicing them at a high level, while continuing to explore and invest in technological innovation at a high level.

Porter’s 5-Forces Analysis

Threat of New Entrants: Medium

Logistics is an attractive industry to enter because there are

no licensing requirements or resource constraints that are

substantial for companies to enter. There is no dominant

figure within the industry, which explains why many

companies are currently fighting for market share in a highly

concentrated environment. It is through effective pricing

strategies that companies can potentially enter the market,

as customers are more inclined in this industry to seek lower

prices. That being said, great brand recognition and highly

effective solutions/products are requirements in order to be

Source: Yahoo! Finance

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successful in the industry. So while it may not be excessively

hard to enter the market, the difficulty comes with trying to

remain above water through competitive advantages in an

extremely competitive space. Transportation provides a

more difficult barrier of entry to the market. A company

must have access to a tremendous amount of capital for

start-up costs. Additionally, having a strong logistics segment

is essential for success in this industry which can be attained

through in-house operations or outsourcing. Licensing and

governmental regulations also add difficulty with time and

compliance hurdles to jump when thinking about entering

the transportation market.

Threat of Substitutes: Medium

It is hard to replace the current methods of transporting

goods and products, which include trucks, trains, ships, and

planes. There are several different types of vehicles available

for use and competitors will continue to try and find the

most efficient ways of travel delivery. Current laws and

regulations surround trucking could pose threats for the

industry and increase the cost of operations16. As

competition continues to heat up in the near future,

companies will have to decide whether to outsource or keep

logistical capabilities in-house. Autonomous vehicles and

other innovative transport pose as a real possibility for

trucking in the future, especially as Amazon eyes to enter

the market3. If autonomous vehicles do become industry

standard 15-20 years into the future, this will change the

whole landscape of how transportation and logistics

companies operate.

Bargaining Power of Customers: High

Customers have a high bargaining power because there are

multiple logistics companies in the market that could meet a

majority of their needs. Third Party Logistics has a low level

of market share concentration. In 2018, the four largest

industry players are expected to account for less than

15.0%12 of industry revenue. The biggest factors for

customers are: price, customer service, service(s) provided,

efficiency, and reliability. Increasing customer expectations

paired with a large supply of services available allow the

customer to buy the cheapest and fastest service available. If

a current logistics company is not meeting their customer’s

current time demands, or their price inflates enough, there

are several alternatives for the customer to seek out. This is

just another reason why strong brand recognition and

reliability are absolutely crucial for success in this industry.

Bargaining Power of Suppliers: Low

Suppliers do not have much bargaining power due to the

industry being so highly competitive with many companies.

Similar to their customers, logistics companies have many

suppliers to choose from, so they can afford to switch

suppliers depending who offers the lowest prices for their

parts and services. Price structure is critical for suppliers, as

variables within the industry are primarily dictated by the

market (fuel prices). Finding a competitive advantage other

than overall capabilities, and marketing to that perception, is

a difficult task in Transportation & Logistics. Truly the best

combination of both product service and customer service

should allow for success.

Competitive Rivalry: High

Competition is very high due to the increasing demand for third party logistics services and the respective low concentrated market. Competition stems through price, customer service, service(s) provided, efficiency, and reliability. Good brand reputation and recognition is extremely crucial in order to remain successful in the industry because the service provided can be duplicated without tremendous difficulty—larger logistics companies can take advantage of taking over entire logistics operations entirely from their customers. The primary competition within the industry results from other in-house operations of customers. Many in-house companies want to leverage their own networks and not rely on other transportation service providers. However, this can also make operations more expensive and could potentially reduce flexibility that could be gained from simply hiring other companies. There is anticipation that companies may start to outsource their logistics operation in the long run as competition increases with newer technological innovation capabilities. Bottom Line:

Current trends provide opportunity for companies to enter

the market with innovative operations in a current changing

landscape. Evolution of the global economic growth rate

and e-commerce illustrates the integration of economies

around the world. Consequently, to deliver goods,

companies must adapt outdated methods to meet new

customer requirements. Companies in this industry must

develop new methods to increase efficiency and

effectiveness in order to gain a competitive advantage in the

long-run. Strong brand recognition and reliability are a

necessity to compete in this industry. An emphasis on

operational quality control is essential towards creating a

reliable brand and meeting these increasing customer

demands. The constant innovation provided in today’s

environment forces companies within this space to invest

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Company Analysis

and have access to the latest technology in order to remain

competitive. We predict that XPO will remain a leader in the

competitive environment because they have been able to

capitalize on logistics growth through an innovative

approach to providing next-level technological services.

Their significant continued investment to research and

development has put them ahead of the curve in providing a

leading transportation and logistics service, contributing

towards a strong brand name and recognition.

Business Summary

XPO Logistics Inc., based out of Greenwich, CT, operates in

the transportation and logistics industry with their strongest

presence in North America, followed by Europe and Asia.

Their revenue streams come from both a transportation and

logistics business segment. Within their transportation

segment they offer a variety of different services to extend

their reach to all types of different customers. These services

include: freight brokerage, less-than-truckload (LTL), last

mile, full truckload, and global forwarding transportation.

Within the logistics segment they offer a variety of services,

including: distribution, warehouse management,

manufacturing, e-commerce fulfillment, and personalization

related supply chain management services. As of October

2018 they have 1,529 locations in 32 different countries with

more than 98,000 employees19.

Corporate Strategy

XPO’s corporate strategy involves leveraging its large

network of professionals, developing and advancing

technology, and managing its physical assets in order to

provide customers with efficient and effective supply chain

and transportation services. With expertise across such a

large variety of supply chain management services, it is

important to their strategy that they effectively market their

professionals to new and existing customers. Advancing

technology has been another huge focus for XPO as they are

investing $450 million in technology research in 2018.11 XPO

recently added an augmented reality transportation service.

This service allows customers to see a virtual image of their

purchased large home furnishing product in their home in

hopes to lower product returns11. XPO has also just added

5,000 robots across their production warehouses that assist

employees in picking orders11. XPO’s heavy focus on

innovation and technology is what differentiates them from

their competitors and makes them desirable to potential

customers. Another huge focus for XPO is to optimize

existing customer’s services by cross-selling logistics with

their transportation business. Lastly, customer service has

been an essential part of their corporate strategy as they are

able to provide innovative solutions for any size company

with any variety of supply chain or transportation needs.

Financial Summary

XPO’s earnings for the most recent 3rd quarter of 2018 came

in at $100.8 million, compared to $57.5 million in quarter 3

of 2017, and their diluted earnings per share was $0.74

compared to $0.44 in 2017. Though they missed analyst

expectations by 9 cents per share in Q3, CEO Bradley Jacobs

acknowledged the results by referencing a $15.6 million

write off due to a customer bankruptcy19. Revenue had an

11.5% year-over-year increase to $4.34 billion. This increase

was largely contributed by logistics’ revenue increase of

13.1% to 1.52 billion. CEO Brad Jacobs attributed this

tremendous growth to rising demand for e-commerce

logistics as well as consumer packaged goods19. Revenue in

the transportation segment increased 10.5% to $2.85 billion

for the quarter. High demands in North America for last mile,

12% increase, and freight brokerage, 17.5% increase,

contributed largely to such growth. XPO financial targets for

2018 consist of an EBITDA of $1.585 billion a year-over-year

increase of 15.7%. Management also expects 2017-2018

cumulative free cash flow to reach $1 billion19. This strong

free cash flow estimate provides stability for the company

and represents a growing foundation looking forward.

Services and Markets

Services are provided to customers of all sizes across many

different industries. Customers range from start-ups to

Fortune 500 companies, with 10% of XPO’s revenue being

attributable to their top 5 customers. Retail and e-commerce

customers accounted for 29% of revenue, while food and

beverage accounted for 16% of revenue in 201718. XPO

minimizes their risk by stretching across a variety of different

sized companies in

many different

industries18.

Transportation

services are widely

reliant on the North

American and

European markets,

while the logistics

segment is reliant

on North American,

European, and

Asian markets Source: XPO 2017 10K

11

Transportation Segment

Source: XPO 2017 10K

Transportation is XPO’s most comprehensive segment. It

is made up of five different services: less-than-truckload

(LTL), freight brokerage, last mile, full truckload, and

Global forwarding. LTL is the largest segment in terms of

revenue for XPO and they are the second largest provider

globally. They use owned physical tractors and trailers to

deliver this line of service to 99% of zip codes in the

United States with services also expanding across Canada

and Europe19. Freight brokerage is XPO’s second largest

segment and they are also the second largest provider

globally. They have a large global freight network that

includes ocean, air, ground, and cross-border

transportation which has proven to be very attractive to

large industrial retailers. While Last Mile services only

make up 8.84% of transportation segment revenue, it is

XPO’s fastest growing segment with 17% growth in 2017.

This growth is mainly funded by the booming e-

commerce industry. XPO has recently just completed

their goal of owning 85 last mile hubs strategically placed

throughout the U.S.—this provides access/availability to

service roughly 90% of the U.S population in a timely

manner. Full truckload services only operate in Europe,

where they are the leading provider. Management has no

plan to expand full truckload operations into North

America due to low margins and a saturated market19.

Global forwarding services are asset-light and mainly

consist of cross-border air and vessel contracted

transportation.

Logistics Segment

Logistics makes up the remaining portion of XPO’s

revenue at 37%. XPO is currently the second largest

contract logistics provider worldwide. Logistics services

include: value added warehousing and distribution, cold

chain solutions, e-commerce fulfillment, reverse logistics,

recycling, storage, factory support, aftermarket support,

manufacturing, distribution, packaging and labeling, and

a range of inventory management services. E-commerce

fulfillment is among XPO largest logistics service

provided. XPO has put a lot of resources into growing

their logistics business due to increasing competition

within the industry. As of the Q3 2018, they have

recorded a record number of new logistic contracts: 46 in

Europe and 44 in North America. XPO expects to add

another 22 contracts in Q4 of 2018, split evenly between

Europe and North America.

S.W.O.T Analysis

Strengths

XPO has a strong international brand portfolio in

Transportation & Logistics. They are averaging roughly

80,000 job applications per month in 2018 which is a

testament to their sound brand image in a tough current

environment. XPO is the second largest contract logistics

provider in the world, second largest global freight

brokerage provider, largest provider of last mile logistics

for heavy goods, second largest provider of less-than-

truckload transportation, and third largest provider of

intermodal services19. They also have both contracted

and brokerage capabilities for transportation services.

This allows the capacity and flexibility to provide the best

solutions for customer demand. XPO currently owns or

leases 10,000 53-ft containers and 5,000 chassis19. A

focus on technology has streamlined and ensured

quicker, more efficient services to its customer. Lastly,

being a single provider for both transportation and

logistics services allows XPO to attract more customers

and allows the opportunity to provide more service to

these customers. This is reflected in their tremendous

revenue growth.

Weaknesses

No company in this industry is immune to external

economic factors. Due to wage inflation and a shortage

of truck drivers, the industry has seen an increase in

driver compensation and has had difficulties attracting

and retaining drivers. This has led to increased costs in

recruitment, wages, and underutilization of truck freight,

leading to potential revenue loss7. Even with mitigating

dynamics, XPO has felt some of this compression. XPO

has also seen an increase in customer trade receivables,

12

Valuation Analysis

which has the potential to have a negative effect on the

company’s cash flows. This has been a trend the past

three years, with net receivables increasing by nearly 2%

from 2016 to 2017.

Opportunities

An increase in e-commerce demand has provided new customer needs and opportunities to take advantage of in the industry. The e-commerce industry is predicted to continue to grow globally at a double-digit rate through 2020, and more companies are continuing to outsource order fulfillment12. The overall economy is strong and the industrials sector as a whole is highly correlated to the performance of the market. Increased consumer spending and the new tax laws have the potential to increase profitability throughout the company. Lastly, total cargo rose 11.8% in 2017, and an increased emphasis on infrastructure investment has driven the demand for raw material transportation15. XPO needs to maintain the rate at which they’re expending resources to dip into technological advancement and capitalize on these opportunities. Threats

The biggest potential threat to XPO is the chance of an

economic downturn; the uncertainty and effects of tariffs

on global trade must be considered as well. China is

historically an innovator in the continued development of

technology and e-commerce, and increased tension there

could potentially slow growth and add conflict6. Increases

in fuel prices and wages also pose a threat to XPO’s

transportation business. The transportation and logistics

industry is a highly competitive and growing industry.

New entrants face low barriers to enter this space, which

sheds potential for price competition amongst peers.

New technology also allows consumers to have ever-

changing expectations & demands, giving new

competitors the ability to disrupt the industry

immediately if taken advantage of.

Methods of Valuation

Our research analysts arrived at the current intrinsic

value for XPO using multiple valuation models: The

Discounted Cash Flow Model (DCF), the Economic Profit

model (EP), the Dividend Discount Model (DDM), and the

Relative Valuation model. The DDM model proved to be

ineffective and gave us an inaccurate share price because

XPO does not currently pay a dividend, nor do they give

guidance on any potential future dividend payments. The

relative valuation model uses competitor P/E and PEG

ratios paired with XPO’s current earnings per share to

come up with a stock price. XPO operates heavily in both

transportation and logistics, which made it harder to

compare to any true competitors. A majority of

companies within this space heavily favor one or the

other. Therefore, we did not feel that the relative

valuation model accurately depicts our stock price. Our

team believes that the DCF and EP model most accurately

reflect XPO’s current intrinsic value. Using the DCF and EP

model we were able to account for economic, industry,

competitive, and company specific factors to arrive at our

BUY rating for XPO Logistics, Inc. with a target price range

of $93 - $99.

Revenue Decomposition

XPO’s revenue is broken up into two main segments,

Transportation and Logistics. The transportation segment

was further broken down into sub segments of

transportation, including: freight brokerage, less-than-

truckload, last mile, full truckload, and global forwarding.

Each area was then broken down between revenue from

North America and Europe. Logistics revenue could not

be further decomposed, as XPO does not provide

guidance for logistics revenue based on geographic

location.

Our team assigned growth rates to the individual sub

segments of transportation, equating to a total

transportation growth. Only one growth rate was

assigned to the logistics segment of XPO’s revenue influx.

The total growth of logistics revenue became a plug.

Total revenue is project to grow at 10% in 2018, aligned

with management expectations and total revenue growth

rates will decrease to 8.75% in 2019, and continue to

decrease by roughly 1% until they hit steady state growth

in 2025 at 3.4%.

Transportation Revenue Growth

We have projected the total transportation segment to

grow by roughly 8% next year based on management

guidance. We project growth to decrease the following 7

years until it hits are continuing value growth rate of

3.25%. North American business makes up a majority of

transportation revenue, comprising roughly 74% of

revenue. LTL is currently XPO’s largest segment of North

13

American transportation revenue, but we have attached

the lowest growth rate, 7% in 2018, as the market is

already saturated with competition and they have the

second largest market share only behind FedEx Freight18

We then decreased the growth rate for LTL by 1% from

2019-2023, and then leveled growth out at 3.25% in

2026. Last mile is currently the smallest portion of North

American transportation revenue, but we have attached

the largest growth rate in 2018, 16%, due to the immense

focus on last mile hubs making last mile delivery

accessible to over 90% of the population20. The Last mile

growth rate will then steadily decrease until it hits a

steady state at 3.25% in 2026. Freight Brokerage is the

last segment of the North America transportation

revenue stream and is projected to grow at 9% in 2018

based on guidance that we received from management.

We then decreased the growth rate by 1% for the next 5

years, applied a steady declining growth rate of .25% in

the following 3 years, until eventually reaching steady

state growth of 3.25% in 2026.

Europe makes up the remaining 26% of transportation

revenue. XPO is investing a lot of resources on expanding

in Europe where they currently are the number one full-

truckload provider8. Full-truckload made up over 65% of

Europe transportation revenue in 2017. However,

because they have already captured most of the full-

truckload business and are the number one provider, we

believe that they have already hit a steady state of

growth. We used a 3.25% steady growth rate across our

model for full truckload revenue. This year XPO has

expanded their transportation services to Europe adding

last mile services. According to management, they plan to

do $40 million in sales in 2018, and are extremely

confident that they will double sales in 2019. This

business segment has a lot of potential for growth, thus,

after 2019 we attached a 45% growth rate and then

continued to keep growth rates high until we steady

them out at 6% in 2024. LTL is the last revenue segment

in Europe. Growth in this segment in 2017 was 6.32%. Per

management expectation, we attached a 5.25% growth

rate in 2018 and then continued to decrease it by 0.25%

until we expect it to steady out at 3.25% in 2026.

Logistics Revenue Growth

We project XPO’s logistics business segment to grow at

14% next year, up from 7.5% growth in 2017 which is in

line with management expectations. We strongly feel

that there is an opportunity here that XPO will benefit

from due to their competitive advantage within this

space. XPO has made it evident that they plan on

increasing their logistics business by taking advantage of

the dramatically increased e-commerce growth that has

been experienced globally. We decreased growth rates

by 1% for the following 6 years from 2018 to 2024, where

we then decreased the growth rate to a steady state of

3.25% in 2026.

Cost of Transportation and Services

XPO’s cost of transportation and service account is their

largest expense on the income statement. It represents

the cost of services for the transportation and logistics

segment of the business. It includes providing freight

transportation and services to customers, truck driver

salaries, and commissions paid to independent

contractors. This account represents 52.85% of revenue

in 2017, which makes it extremely sensitive to our

NOPLAT and intrinsic value calculation. Our research

team agreed to decrease the account by 1% of revenue

to 51.85% in 2018, and to continue decreasing it by 1%

for the following 2 years. It will reach a 49% steady state

starting in 2022. The decision to decrease the account

was made because of management’s goal to decrease

margins by 1%, in which they are on track to meet for

2018. This decrease is due to a focus on providing mix

services (transportation and logistics services) to its

customers, as well as an increase focused on technology

that will increase efficiency and lower their wage

expenses. Looking ahead, automation within the supply

chain with the addition of robots and other future

initiatives will decrease overall costs associated with

transportation and services.

Direct Operating Expense

Direct operating expense is the second largest expense

on the income statement, representing 29.69% of

revenue in 2017. This account mainly consists of

personnel, facility and equipment, materials and supplies,

and information technology expenses. We increased

operating expenses by about 1% to 30.50% in 2018 and

then kept it constant for the remainder of our valuation

model. We increased it due to the 30 last mile hubs

added this year, which in turn will increase facility

expenses. This increase is comparable to the increase of

0.95% increase seen from 2016 to 2017 when 25 new last

mile hubs were added.

14

Sensitivity Analysis

Capital Expenditures (CapEx)

We forecasted capital expenditures to be $470 million in

2018 based on current expenditures and projections for

the remainder of the year. We then increased CapEx by

the growth in transportation revenue for each year. We

based our CapEx growth on transportation revenue

because this is our asset heavy revenue segment, which

we believe best reflects the growth of projects that XPO

invests in. Management stated that as long as the

economy is healthy, capital expenditure growth will be a

main focus in order to continue to grow the company.

XPO’s yearly fixed maintenance capital expense is $225

million, which leaves $255 million used to fuel other

projects in 2018. There is much anticipation and

speculation of future M&A activity due to high free cash

flow levels. While we cannot predict M&A activity into

our model, we believe that XPO has the capacity to

increase CapEx further, and would not be surprised if

such activity occurred in the near future.

Weighted Average Cost of Capital (WACC)

The WACC calculation for our companies is one of the

most model sensitive components because it is used to

discount our free cash flows used in the calculation of our

intrinsic value in the DCF and EP model. The capital

structure of XPO consists of: 60.43% equity, 39.31% debt,

and .26% preferred equity. We assume the capital

structure to stay stable in the future.

Cost of Equity and Preferred Equity

Risk-Free Rate: 3.189%

Market Risk Premium: 5.00%

Raw Beta: 1.628

The Cost of Equity was calculated using the Capital Asset Pricing Model (CAPM). The CAPM model requires that we make assumptions for the risk-free rate, Raw BETA, and the Equity Risk Premium relative to XPO Logistics. We chose to use the 10-Year Treasury-Note for our risk-free rate (3.189%) and a Raw Beta from historical data using Bloomberg (1.628). The Raw Beta was collected from a 2 year duration of weekly returns to best represent the current state of XPO’s operations. The Equity Risk Premium was calculated by taking an average from historic S&P 500 returns as well information provided by Aswath Damodaran, a well trusted corporate finance professor at the New York Stern School of

business (5.00%). Using these assumptions, we calculated a cost of equity of 11.86%. Dividend Yield: 4%

Cost of preferred equity is the preferred stock dividend

yield, which is 4% and we are using the assumption that

this will stay constant for the duration of our model.

Cost of Debt

Pre-Tax Cost of Debt: 5.01%

Marginal Tax Rate: 22.93%

XPO’s debt rating was recently upgraded by Moody’s and

S&P to Ba2, and BB respectively. This upgrade lowered

our pre-tax cost of debt, as the vote of confidence in

XPO’s rating increase lowers the default risk assumption.

We used the 2034 bond yield of 5.01%, which was the

longest maturity bond, for our pre-tax cost of debt.

Taking the bond yield (5.01%) and multiplying it by one

minus the marginal tax rate (1-22.93%) we arrived at

3.86% for our cost of debt.

Using our calculated cost of equity (11.86%) and

multiplying it by the weight of equity (60.43%) then

adding it our cost of preferred equity (4%) times the

weight (0.26%) and the cost of debt (3.86%) times the

weight (39.31%), we arrived at our WACC of 8.328%.

CV Growth of NOPLAT

Continuing Value (CV) growth of NOPLAT was projected

at 3.25%. This projection was made based on our long

term GDP growth outlook of 3.25%. We also took into

account steady revenue growth.

WACC against CV growth of NOPLAT

We compared CV growth rate of NOPLAT to WACC to see

how changes in capital structure and our continuing long-

term growth would affect our stock price. Changing

weighted average cost of capital reflects changes in the

structure of a company. As XPO continues to grow it is

15

possible that the structure of the company will change,

especially with their focus on paying down debt. To

display these changes, we increased and decreased

WACC by 0.50%. Continuing value of NOPLAT displays are

estimate for steady state long-term growth, the state of

the economy in the future can be very inconstant so we

tested these changes effect on our stock price by

increasing and decreasing growth rates by 0.50%.

Beta against the Market Risk Premium

We tested the beta against the market risk premium in

order to see how the risk of the market affected the

value of our stock price compared to XPO’s volatility

towards the market. Beta, which is used in our cost of

equity calculation has shown to be a big driver in the

stock price calculation. By changing beta by just 0.1, our

sensitivity analysis shows a major swing in the stock

price. Market risk premium is constantly changing due to

all of the variables that go into projecting the outlook of

market returns. In order to get an idea of how the

volatility of the market effects our stock price, we

manipulated the market risk premium by 0.3%, which

also proved to have a dramatic effect on our stock price.

2025 CapEx with CV Cost of Transportation &

services

We tested 2025 capital expenditures starting in year 2024 with our continuing value of cost of transportation & services to see how major operational changes in later years will impact our stock price. Capital expenditures directly affect our PP&E account. We changed capital expenditures by $50 million to show the potential effects of XPO taking on more or less projects in the future. CV cost of transportation and services is the biggest expense account on the income statement and represents not all, but most of XPO’s cost of services. We assume that XPO will increase efficiencies and thus decrease cost of services, so we applied a 0.50% change to this account to

see how different cost structure will impact our stock price. CV ROIC against the Risk-Free Rate

We plotted the CV ROIC against the risk-free rate to see how XPO reacts to changes in federal interest rates as well as their own internal returns on Invested capital. With the current expectation of continued interest rate hikes, we wanted to see how that would affect our stock price. We changed the risk-free rate by 20 basis points (.20%) to reflect these changes. The CV ROIC can vary based on different projects that XPO takes on. We chose to see how different returns on invested capital would impact our stock price by increasing and decreasing CV of ROIC by 1%. CV Direct Operating Expense against CV Logistics

Revenue

We compared continuing value of direct operating expenses against the continuing value of logistics revenue growth to see how changes in business operations expenses and the growth of their logistics segment will affect the intrinsic value of XPO’s stock price. Direct operating expenses are impacted largely by facility and maintenance expenses. If XPO were to expand operations in their logistic segment in new markets, like Asia, their facility expense would increase. By comparing these two variables, we see how growing the logistics segment of the company would impact the intrinsic value of XPO’s stock price.

16

References

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SECURITIES AND EXCHANGE COMMISION

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SECURITIES AND EXCHANGE COMMISSION

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17

Important Disclaimer

This report was created by students enrolled in the Security

Analysis (6F:112) class at the University of Iowa. The report

was originally created to offer an internal investment

recommendation for the University of Iowa Krause Fund and

its advisory board. The report also provides potential

employers and other interested parties an example of the

students’ skills, knowledge and abilities. Members of the

Krause Fund are not registered investment advisors, brokers

or officially licensed financial professionals. The investment

advice contained in this report does not represent an offer or

solicitation to buy or sell any of the securities mentioned.

Unless otherwise noted, facts and figures included in this

report are from publicly available sources. This report is not

a complete compilation of data, and its accuracy is not

guaranteed. From time to time, the University of Iowa, its

faculty, staff, students, or the Krause Fund may hold a

financial interest in the companies mentioned in this report.

XPO Logistics, Inc.

Key Assumptions of Valuation Model

Ticker Symbol XPO

Current Share Price $81.03

Current Model Date 11/9/2018

FY End (month/day) Dec. 31

Pre‐Tax Cost of Debt 5.01%

Cost of Equity 11.33%

Beta 1.628

Risk‐Free Rate 3.19%

Market Risk Premium 5.00%

CV Growth  3.25%

CV ROIC 17.19%

CV ROE 9.42%

WACC 8.33%

Preferred Stock Dividend Yield 4%

Marginal Tax Rate 22.93%

Effective Tax Rate 21%

Current Stock Price $81.03

Target Price 94.77$       

Upside Potential 16.96%

RATING BUY

XPO Logistics, Inc.

Revenue Decomposition

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E

North America

  Freight Brokerage 1,935.00 2,154.40 2,516.20 2,742.66 2,962.07 3,169.42 3,359.58 3,527.56 3,668.66 3,806.24 3,939.46 4,067.49

  Less‐Than‐Truckload 559.20 3,445.30 3,641.20 3,896.08 4,129.85 4,336.34 4,509.80 4,678.91 4,842.67 5,000.06 5,162.56 5,330.35

  Last Mile 692.80 828.20 966.00 1,120.56 1,266.23 1,392.86 1,490.36 1,579.78 1,658.77 1,733.41 1,802.75 1,865.84

  Full Truckload 86.00 431.90

  Total North America 3,273.00 6,859.80 7,123.40 7,759.30 8,358.15 8,898.61 9,359.73 9,786.25 10,170.10 10,539.71 10,904.77 11,263.68

Europe

  Full Truckload 928.80 1,582.40 1,631.80 1,684.83 1,739.59 1,796.13 1,854.50 1,914.77 1,977.00 2,041.26 2,107.60 2,176.09

  Less‐Than‐Truckload 439.20 826.40 878.60 924.73 970.96 1,017.08 1,062.85 1,108.02 1,152.34 1,195.56 1,237.40 1,277.62

  Last Mile 45.00 90.00 130.50 169.65 195.10 218.51 231.62 243.20 251.10

  Total Europe 1,368.00 2,408.80 2,510.40 2,654.56 2,800.55 2,943.71 3,087.00 3,217.89 3,347.86 3,468.43 3,588.20 3,704.82

  Global Forwarding 295.30 331.30 301.30 311.09 321.20 331.64 342.42 352.69 363.27 374.17 385.40 396.96

  Eliminations (11.90) (142.60) (114.60) (114.60) (114.60) (114.60) (114.60) (114.60) (114.60) (114.60) (114.60) (114.60)

Total Transportation Revenue 4,924.40 9,457.30 9,820.50 10,610.35 11,365.31 12,059.37 12,674.56 13,242.24 13,766.63 14,267.71 14,763.76 15,250.85

Total Logistics Revenue 2,768.40 5,323.90 5,722.70 6,523.88 7,371.98 8,256.62 9,164.85 10,081.33 10,988.65 11,867.75 12,461.13 12,866.12

Total Revenue 7,692.80 14,781.20 15,543.20 17,134.23 18,737.29 20,315.99 21,839.40 23,323.57 24,755.29 26,135.46 27,224.89 28,116.97

XPO Logistics, Inc.

Income Statement

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E

Revenue 7,623.20 14,619.40 15,380.80 17,134.23 18,737.29 20,315.99 21,839.40 23,323.57 24,755.29 26,135.46 27,224.89 28,116.97

Operating expenses

Cost of transportation & services 4,171.40 7,886.00 8,128.80 8,884.10 9,527.91 10,127.52 10,777.75 11,428.55 12,130.09 12,806.37 13,340.20 13,777.32

Direct operating expense 2,202.70 4,201.30 4,567.00 5,225.94 5,714.87 6,196.38 6,661.02 7,113.69 7,550.36 7,971.31 8,303.59 8,575.68

Depreciation expense 215.00 490.80 476.00 479.47 477.76 483.17 494.11 509.05 526.61 545.90 566.23 587.22

Amortization expense 149.90 152.60 182.40 160.40 154.00 147.90 140.30 130.30 125.09 120.08 115.28 110.67

Sales, general & administrative expense 912.80 1,400.60 1,403.40 1,713.42 1,920.57 2,133.18 2,347.74 2,565.59 2,784.97 3,005.58 3,266.99 3,514.62

Total operating expenses 7,651.80 14,131.30 14,757.60 16,463.33 17,795.12 19,088.14 20,420.91 21,747.18 23,117.12 24,449.25 25,592.29 26,565.50

Operating income (loss) (28.60) 488.10 623.20 670.90 942.17 1,227.84 1,418.50 1,576.38 1,638.16 1,686.21 1,632.60 1,551.47

Other expense (income) (7.60) (9.20) (15.40) (26.64) (26.54) (26.84) (27.45) (28.28) (29.26) (30.33) (31.46) (32.62)

Foreign currency loss (gain) 44.80 (40.30) 57.60 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Debt extinguishment loss 69.70 36.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Interest expense 216.70 361.10 284.30 226.47 216.78 209.33 255.15 259.05 221.47 219.25 225.71 232.27

Income (loss) before income tax provision (benefit) (282.50) 106.80 260.70 471.07 751.94 1,045.36 1,190.79 1,345.62 1,445.95 1,497.28 1,438.35 1,351.82

Income tax provision (benefit) (90.90) 22.30 (99.50) 108.03 172.44 239.74 273.09 308.59 331.60 343.38 329.86 310.02

Net income (loss) (191.60) 84.50 360.20 363.04 579.49 805.62 917.70 1,037.02 1,114.34 1,153.91 1,108.49 1,041.80

Net income (loss) attributable to non‐controlling interest 0.50 (15.50) (20.00) (10.00) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Net income (loss) attributable to XPO (191.10) 69.00 340.20 353.04 579.49 805.62 917.70 1,037.02 1,114.34 1,153.91 1,108.49 1,041.80

Earning per share data

Net income (loss) available to common shareholders (245.90) 63.10 312.40 350.14 576.59 802.72 914.80 1,034.12 1,111.44 1,151.01 1,105.59 1,038.90

Basic earnings (loss) per share (2.65) 0.57 2.72 3.04 5.00 6.95 7.91 8.93 9.60 9.94 9.55 8.98

Weighted‐average common shares outstanding

Basic weighted average shares outstanding 92.80 110.20 114.90 115.10 115.29 115.49 115.69 115.75 115.75 115.75 115.75 115.75

XPO Logistics, Inc.

Balance Sheet

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E

ASSETS

Current assets:

Cash & cash equivalents 289.80 373.40 396.90 601.43 1,037.95 2,773.41 3,613.69 3,875.14 4,721.34 6,012.43 7,102.98 8,369.33

Accounts receivable, net 2,266.40 2,313.30 2,725.30 3,127.00 3,466.40 3,788.93 4,105.81 4,419.82 4,728.26 5,031.08 5,281.63 5,496.87

Other current assets 401.00 386.90 465.70 556.86 637.07 741.53 829.90 921.28 1,014.97 1,110.76 1,157.06 1,194.97

Total current assets 2,957.20 3,073.60 3,587.90 4,285.29 5,141.42 7,303.87 8,549.40 9,216.23 10,464.57 12,154.26 13,541.67 15,061.17

Property & equipment, gross 3,061.50 3,127.30 3,773.20 4,243.20 4,751.00 5,294.93 5,872.08 6,478.68 7,112.44 7,771.30 8,454.14 9,160.72

Less: accumulated depreciation 209.30 589.90 1,109.50 1,588.97 2,066.73 2,549.90 3,044.00 3,553.06 4,079.67 4,625.57 5,191.80 5,779.02

Property & equipment, net 2,852.20 2,537.40 2,663.70 2,654.23 2,684.27 2,745.04 2,828.08 2,925.62 3,032.77 3,145.73 3,262.34 3,381.70

Goodwill 4,610.60 4,325.80 4,563.60 4,563.60 4,563.60 4,563.60 4,563.60 4,563.60 4,563.60 4,563.60 4,563.60 4,563.60

Identified intangible assets, gross 2,101.00 1,911.80 1,994.80 1,994.80 1,994.80 1,994.80 1,994.80 1,994.80 1,994.80 1,994.80 1,994.80 1,994.80

Less: accumulated amortization ‐ identified intangible assets 224.50 377.10 559.50 719.90 873.90 1,021.80 1,162.10 1,292.40 1,417.49 1,537.57 1,652.85 1,763.52

Identified intangible assets, net 1,876.50 1,534.70 1,435.30 1,274.90 1,120.90 973.00 832.70 702.40 577.31 457.23 341.95 231.28

Deferrred tax asset 113.60 2.70 7.70 7.70 7.70 7.70 7.70 7.70 7.70 7.70 7.70 7.70

Other long term assets 233.10 224.20 343.40 342.68 374.75 406.32 436.79 466.47 495.11 522.71 544.50 562.34

Total long‐term assets 9,686.00 8,624.80 9,013.70 8,843.12 8,751.22 8,695.66 8,668.87 8,665.79 8,676.49 8,696.97 8,720.08 8,746.61

Total assets 12,643.20 11,698.40 12,601.60 13,128.40 13,892.64 15,999.53 17,218.27 17,882.02 19,141.06 20,851.22 22,261.75 23,807.78

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable 1,063.70 1,056.30 1,250.70 1,456.41 1,592.67 1,777.65 1,910.95 2,099.12 2,227.98 2,482.87 2,586.36 2,741.40

Accrued expenses 1,291.80 1,382.10 1,525.80 1,713.42 1,873.73 2,031.60 2,074.74 2,215.74 2,289.86 2,417.53 2,450.24 2,671.11

Current maturities of long‐term debt 135.30 136.50 103.70 300.20 420.90 1,494.60 1,600.60 884.30 875.43 901.23 927.42 947.42

Other current liabilities 203.60 156.70 116.90 171.34 187.37 203.16 218.39 233.24 185.66 196.02 204.19 210.88

Total current liabilities 2,694.40 2,731.60 2,997.10 3,641.38 4,074.67 5,507.01 5,804.69 5,432.39 5,578.93 5,997.65 6,168.22 6,570.82

Long‐term debt 5,272.60 4,731.50 4,417.50 4,027.55 3,758.09 3,599.31 3,571.05 3,537.19 3,501.72 3,604.93 3,709.70 3,789.69

Deferred tax liability 933.30 572.40 418.80 418.80 418.80 418.80 418.80 418.80 418.80 418.80 418.80 418.80

Employee benefit obligations 312.60 251.40 162.10 121.58 91.18 68.39 51.29 38.47 28.85 21.64 16.23 12.17

Other long‐term liabilities 369.50 373.90 596.10 556.86 608.96 660.27 709.78 758.02 804.55 849.40 884.81 913.80

Total long‐term liabilities 6,888.00 5,929.20 5,594.50 5,124.79 4,877.04 4,746.77 4,750.92 4,752.47 4,753.92 4,894.77 5,029.54 5,134.46

Stockholders' equity:

Convertible perpetual preferred stock 42.00 41.60 41.20 40.80 40.40 40.00 39.60 39.20 38.80 38.40 38.00 37.60

Common stock and Additional paid‐in capital 3,212.40 3,245.00 3,590.10 3,592.60 3,595.10 3,597.60 3,600.10 3,600.87 3,600.87 3,600.87 3,600.87 3,600.87

Accumulated deficit (Retained earnings) (465.00) (392.90) (42.60) 307.54 884.13 1,686.86 2,601.66 3,635.78 4,747.23 5,898.24 7,003.82 8,042.72

Accumulated other comprehensive income (loss) (72.30) (193.70) 15.70 15.70 15.70 15.70 15.70 15.70 15.70 15.70 15.70 15.70

Total stockholders' equity before noncontrolling interests 2,717.10 2,700.00 3,604.40 3,956.64 4,535.33 5,340.16 6,257.06 7,291.56 8,402.60 9,553.21 10,658.40 11,696.90

Noncontrolling interests 343.70 337.60 405.60 405.60 405.60 405.60 405.60 405.60 405.60 405.60 405.60 405.60

Total equity 3,060.80 3,037.60 4,010.00 4,362.24 4,940.93 5,745.76 6,662.66 7,697.16 8,808.20 9,958.81 11,064.00 12,102.50

Total liabilities and equity 12,643.20 11,698.40 12,601.60 13,128.40 13,892.64 15,999.53 17,218.27 17,882.02 19,141.06 20,851.22 22,261.75 23,807.78

XPO Logistics, Inc.

Cash Flow Statement

Fiscal Years Ending Dec. 31 2015 2016 2017

Operating activities

Net income (loss) (191.60) 84.50 360.20

Adjustments to reconcile net income (loss) to net cash from operating activities

Provisions (recovery) for allowance for doubtful accounts

Depreciation & amortization expense 364.90 643.40 658.40

Stock compensation expense 27.90 54.50 79.20

Unrealized loss (gain) on foreign currency option & forward contracts 1.00 (39.70) 49.30

Loss on extinguishment of debt 69.70 36.10

Accretion of debt 6.40 17.00 19.40

Deferred tax benefit (expense) (91.90) (20.90) (157.70)

Other  9.40 7.40 11.60

Changes in assets and liabilities:

Accounts receivable 7.80 (153.70) (320.10)

Other assets (35.30) 17.20 (78.70)

Accounts payable (51.30) 1.70 140.10

Accrued expenses & other liabilities 43.50 (55.70) 0.80

Net cash flows from operating activities 90.80 625.40 798.60

Investing activities

Payment for purchases of property & equipment (249.00) (483.40) (503.80)

Proceeds from sale of assets 60.30 68.90 79.10

Proceeds from sale of business, net of $10.5 cash divested 547.70

Acquisition of business, net of cash acquired (3,887.00)

Loss on forward contract related to acquisition (9.70)

Other  8.80

Net cash flows from investing activities (4,085.40) 142.00 (424.70)

Financing activities

Repurchase of debt (1,889.20) (1,386.60)

Proceeds from issuance of long‐term debt 4,151.80 1,377.80 819.20

Repayment of long‐term debt & capital leases (1,215.60) (151.40) (106.40)

Proceeds from borrowing on ABL facility 360.00 995.00

Repayment of borrowings on ABL facility (330.00) (925.00)

Payment of debt issuance costs (42.90) (25.80) (16.80)

Payment for tax witholdings for restricted shares (11.10) (16.60)

Dividends paid (2.80) (5.40) (6.60)

Proceeds from issuance of senior notes, net

Proceeds from issuance of convertible senior notes, net

Change in bank overdrafts (12.30) (16.50) (2.80)

Proceeds from common stock & preferred stock offerings 1,260.00 287.60

Purchase of non‐controlling interest (459.70) (1.40)

Payment for equity issuance costs (31.90)

Other cash flows from financing activities 7.40 12.20 7.40

Net cash flows from financing activities 3,644.90 680.80 366.40

Effect of exchange rate changes on cash 4.60 3.00 16.00

Net increase (decrease) in cash & cash equivalents (354.30) 83.60 23.50

Cash & cash equivalents, beginning of year 644.10 289.80 373.40

Cash & cash equivalents, end of year 289.80 373.40 396.90

XPO Logistics, Inc.

Forecast Cash Flow Statement

Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021E 2022E 2016 2024E 2025E 2026E

Operating activities

Net income (loss) 353.04  579.49  805.62  917.70  1037.02  1114.34  1153.91  1108.49  1041.80 

Adjustments to reconcile net income (loss) to net cash from operating 

activities

Change in Deferred Taxes 0.00  0.00  0.00  0.00  0.00  0.00  0.00  0.00  0.00 

Depreciation & amortization expense 639.87  631.76  631.07  634.41  639.35  651.70  665.98  681.51  697.89 

Changes in assets and liabilities:

Accounts receivable (401.70) (339.40) (322.53) (316.88) (314.01) (308.44) (302.82) (250.55) (215.24)

Other Current Assets (91.16) (80.21) (104.47) (88.36) (91.38) (93.69) (95.79) (46.30) (37.91)

Accounts payable 205.71 136.26 184.98 133.30 188.17 128.85 254.89 103.50 155.04

Other Current Liabilities 54.44 16.03 15.79 15.23 14.84 (47.57) 10.35 8.17 6.69

Accrued expenses 187.62 160.31 157.87 43.14 141.00 74.12 127.67 32.71 220.87

Net cash flows from operating activities 947.82 1104.24 1368.33 1338.55 1615.00 1519.32 1814.19 1637.52 1869.14

Investing activities

Payment for purchases of property & equipment (470.00) (507.80) (543.93) (577.15) (606.59) (633.76) (658.86) (682.84) (706.58)

       Other Long‐Term Assets 0.72 (32.06) (31.57) (30.47) (29.68) (28.63) (27.60) (21.79) (17.84)

       Capitalization of intangible assets 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Net cash flows from investing activities (469.28) (539.86) (575.51) (607.62) (636.28) (662.40) (686.46) (704.63) (724.42)

Financing activities

       Other Long‐Term Liabilities (39.24) 52.10 51.31 49.51 48.24 46.53 44.86 35.41 28.99

       Proceeds from issuance (payment) of Long‐Term Debt (389.95) (269.46) (158.78) (28.26) (33.86) (35.47) 103.21 104.77 79.99

       Employee Benefit Obligation (40.53) (30.39) (22.80) (17.10) (12.82) (9.62) (7.21) (5.41) (4.06)

       Current Maturities of Long‐Term Debt 196.50 120.70 1073.70 106.00 (716.30) (8.87) 25.80 26.19 20.00

       Proceeeds from issuance of common stock 2.50 2.50 2.50 2.50 0.77 0.00 0.00 0.00 0.00

       Repurchase of convertible preferred stock (0.40) (0.40) (0.40) (0.40) (0.40) (0.40) (0.40) (0.40) (0.40)

       Dividend Payment (2.90) (2.90) (2.90) (2.90) (2.90) (2.90) (2.90) (2.90) (2.90)

Net cash flows from financing activities (274.01) (127.85) 942.63 109.36 (717.28) (10.72) 163.35 157.66 121.63

Net increase (decrease) in cash & cash equivalents 204.53 436.53 1735.45 840.29 261.44 846.21 1291.08 1090.55 1266.35

Cash & cash equivalents, beginning of year 396.90 601.43 1037.95 2773.41 3613.69 3875.14 4721.34 6012.43 7102.98

Cash & cash equivalents, end of year 601.43 1037.95 2773.41 3613.69 3875.14 4721.34 6012.43 7102.98 8369.33

XPO Logistics, Inc.

Common Size Income Statement

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E

Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Operating expensesCost of transportation & services 54.72% 53.94% 52.85% 51.85% 50.85% 49.85% 49.35% 49.00% 49.00% 49.00% 49.00% 49.00%

Direct operating expense 28.89% 28.74% 29.69% 30.50% 30.50% 30.50% 30.50% 30.50% 30.50% 30.50% 30.50% 30.50%

Depreciation expense 2.82% 3.36% 3.09% 2.80% 2.55% 2.38% 2.26% 2.18% 2.13% 2.09% 2.08% 2.09%

Amortization expense 1.97% 1.04% 1.19% 0.94% 0.82% 0.73% 0.64% 0.56% 0.51% 0.46% 0.42% 0.39%

Sales, general & administrative expense 11.97% 9.58% 9.12% 10.00% 10.25% 10.50% 10.75% 11.00% 11.25% 11.50% 12.00% 12.50%

Total operating expenses 100.38% 96.66% 95.95% 96.08% 94.97% 93.96% 93.50% 93.24% 93.38% 93.55% 94.00% 94.48%

Operating income (loss) ‐0.38% 3.34% 4.05% 3.92% 5.03% 6.04% 6.50% 6.76% 6.62% 6.45% 6.00% 5.52%

Other expense (income) ‐0.10% ‐0.06% ‐0.10% ‐0.16% ‐0.14% ‐0.13% ‐0.13% ‐0.12% ‐0.12% ‐0.12% ‐0.12% ‐0.12%

Foreign currency loss (gain) 0.59% ‐0.28% 0.37% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Debt extinguishment loss 0.48% 0.23% 0.00%

Interest expense 2.84% 2.47% 1.85% 1.32% 1.16% 1.03% 1.17% 1.11% 0.89% 0.84% 0.83% 0.83%

Income (loss) before income tax provision (benefit) ‐3.71% 0.73% 1.69% 2.75% 4.01% 5.15% 5.45% 5.77% 5.84% 5.73% 5.28% 4.81%

Income tax provision (benefit) ‐1.19% 0.15% ‐0.65% 0.63% 0.92% 1.18% 1.25% 1.32% 1.34% 1.31% 1.21% 1.10%

Net income (loss) ‐2.51% 0.58% 2.34% 2.12% 3.09% 3.97% 4.20% 4.45% 4.50% 4.42% 4.07% 3.71%

Net income (loss) attributable to non-controlling interest 0.01% ‐0.11% ‐0.13% ‐0.06% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Net income (loss) attributable to XPO ‐2.51% 0.47% 2.21% 2.06% 3.09% 3.97% 4.20% 4.45% 4.50% 4.42% 4.07% 3.71%

XPO Logistics, Inc.

Common Size Balance Sheet

% of Sales

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E

ASSETS

Current assets:

Cash & cash equivalents 3.80% 2.55% 2.58% 3.51% 5.54% 13.65% 16.55% 16.61% 19.07% 23.00% 26.09% 29.77%

Accounts receivable, net 29.73% 15.82% 17.72% 18.25% 18.50% 18.65% 18.80% 18.95% 19.10% 19.25% 19.40% 19.55%

Other current assets 5.26% 2.65% 3.03% 3.25% 3.40% 3.65% 3.80% 3.95% 4.10% 4.25% 4.25% 4.25%

Total current assets 38.79% 21.02% 23.33% 25.01% 27.44% 35.95% 39.15% 39.51% 42.27% 46.50% 49.74% 53.57%

Property & equipment, gross 40.16% 21.39% 24.53% 24.76% 25.36% 26.06% 26.89% 27.78% 28.73% 29.73% 31.05% 32.58%

Less: accumulated depreciation 2.75% 4.04% 7.21% 9.27% 11.03% 12.55% 13.94% 15.23% 16.48% 17.70% 19.07% 20.55%

Property & equipment, net 37.41% 17.36% 17.32% 15.49% 14.33% 13.51% 12.95% 12.54% 12.25% 12.04% 11.98% 12.03%

Goodwill 60.48% 29.59% 29.67% 26.63% 24.36% 22.46% 20.90% 19.57% 18.43% 17.46% 16.76% 16.23%

Identified intangible assets, gross 27.56% 13.08% 12.97% 11.64% 10.65% 9.82% 9.13% 8.55% 8.06% 7.63% 7.33% 7.09%

Less: accumulated amortization ‐ identified intangible assets 2.94% 2.58% 3.64% 4.20% 4.66% 5.03% 5.32% 5.54% 5.73% 5.88% 6.07% 6.27%

Identified intangible assets, net 24.62% 10.50% 9.33% 7.44% 5.98% 4.79% 3.81% 3.01% 2.33% 1.75% 1.26% 0.82%

Deferrred tax asset 1.49% 0.02% 0.05% 0.04% 0.04% 0.04% 0.04% 0.03% 0.03% 0.03% 0.03% 0.03%

Other long term assets 3.06% 1.53% 2.23% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%

Total long‐term assets 127.06% 59.00% 58.60% 51.61% 46.70% 42.80% 39.69% 37.15% 35.05% 33.28% 32.03% 31.11%

Total assets 165.85% 80.02% 81.93% 76.62% 74.14% 78.75% 78.84% 76.67% 77.32% 79.78% 81.77% 84.67%

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable 13.95% 7.23% 8.13% 8.50% 8.50% 8.75% 8.75% 9.00% 9.00% 9.50% 9.50% 9.75%

Accrued expenses 16.95% 9.45% 9.92% 10.00% 10.00% 10.00% 9.50% 9.50% 9.25% 9.25% 9.00% 9.50%

Current maturities of long‐term debt 1.77% 0.93% 0.67% 1.75% 2.25% 7.36% 7.33% 3.79% 3.54% 3.45% 3.41% 3.37%

Other current liabilities 2.67% 1.07% 0.76% 1.00% 1.00% 1.00% 1.00% 1.00% 0.75% 0.75% 0.75% 0.75%

Total current liabilities 35.34% 18.68% 19.49% 21.25% 21.75% 27.11% 26.58% 23.29% 22.54% 22.95% 22.66% 23.37%

Long‐term debt 69.17% 32.36% 28.72% 23.51% 20.06% 17.72% 16.35% 15.17% 14.15% 13.79% 13.63% 13.48%

Deferred tax liability 12.24% 3.92% 2.72% 2.44% 2.24% 2.06% 1.92% 1.80% 1.69% 1.60% 1.54% 1.49%

Employee benefit obligations 4.10% 1.72% 1.05% 0.71% 0.49% 0.34% 0.23% 0.16% 0.12% 0.08% 0.06% 0.04%

Other long‐term liabilities 4.85% 2.56% 3.88% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25%

Total long‐term liabilities 90.36% 40.56% 36.37% 29.91% 26.03% 23.36% 21.75% 20.38% 19.20% 18.73% 18.47% 18.26%

Stockholders' equity: 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Convertible perpetual preferred stock 0.55% 0.28% 0.27% 0.24% 0.22% 0.20% 0.18% 0.17% 0.16% 0.15% 0.14% 0.13%

Common stock and Additional paid‐in capital 42.14% 22.20% 23.34% 20.97% 19.19% 17.71% 16.48% 15.44% 14.55% 13.78% 13.23% 12.81%

Accumulated deficit (Retained earnings) ‐6.10% ‐2.69% ‐0.28% 1.79% 4.72% 8.30% 11.91% 15.59% 19.18% 22.57% 25.73% 28.60%

Accumulated other comprehensive income (loss) ‐0.95% ‐1.32% 0.10% 0.09% 0.08% 0.08% 0.07% 0.07% 0.06% 0.06% 0.06% 0.06%

Total stockholders' equity before noncontrolling interests 35.64% 18.47% 23.43% 23.09% 24.20% 26.29% 28.65% 31.26% 33.94% 36.55% 39.15% 41.60%

Noncontrolling interests 4.51% 2.31% 2.64% 2.37% 2.16% 2.00% 1.86% 1.74% 1.64% 1.55% 1.49% 1.44%

Total equity 40.15% 20.78% 26.07% 25.46% 26.37% 28.28% 30.51% 33.00% 35.58% 38.10% 40.64% 43.04%

Total liabilities and equity 165.85% 80.02% 81.93% 76.62% 74.14% 78.75% 78.84% 76.67% 77.32% 79.78% 81.77% 84.67%

XPO Logistics, Inc.

Common Size Balance Sheet

% of Assets

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E

ASSETS

Current assets:

Cash & cash equivalents 2.29% 3.19% 3.15% 4.58% 7.47% 17.33% 20.99% 21.67% 24.67% 28.83% 31.91% 35.15%

Accounts receivable, net 17.93% 19.77% 21.63% 23.82% 24.95% 23.68% 23.85% 24.72% 24.70% 24.13% 23.73% 23.09%

Other current assets 3.17% 3.31% 3.70% 4.24% 4.59% 4.63% 4.82% 5.15% 5.30% 5.33% 5.20% 5.02%

Total current assets 23.39% 26.27% 28.47% 32.64% 37.01% 45.65% 49.65% 51.54% 54.67% 58.29% 60.83% 63.26%

Property & equipment, gross 24.21% 26.73% 29.94% 32.32% 34.20% 33.09% 34.10% 36.23% 37.16% 37.27% 37.98% 38.48%

Less: accumulated depreciation 1.66% 5.04% 8.80% 12.10% 14.88% 15.94% 17.68% 19.87% 21.31% 22.18% 23.32% 24.27%

Property & equipment, net 22.56% 21.69% 21.14% 20.22% 19.32% 17.16% 16.42% 16.36% 15.84% 15.09% 14.65% 14.20%

Goodwill 36.47% 36.98% 36.21% 34.76% 32.85% 28.52% 26.50% 25.52% 23.84% 21.89% 20.50% 19.17%

Identified intangible assets, gross 16.62% 16.34% 15.83% 15.19% 14.36% 12.47% 11.59% 11.16% 10.42% 9.57% 8.96% 8.38%

Less: accumulated amortization ‐ identified intangible assets 1.78% 3.22% 4.44% 5.48% 6.29% 6.39% 6.75% 7.23% 7.41% 7.37% 7.42% 7.41%

Identified intangible assets, net 14.84% 13.12% 11.39% 9.71% 8.07% 6.08% 4.84% 3.93% 3.02% 2.19% 1.54% 0.97%

Deferrred tax asset 0.90% 0.02% 0.06% 0.06% 0.06% 0.05% 0.04% 0.04% 0.04% 0.04% 0.03% 0.03%

Other long term assets 1.84% 1.92% 2.73% 2.61% 2.70% 2.54% 2.54% 2.61% 2.59% 2.51% 2.45% 2.36%

Total long‐term assets 76.61% 73.73% 71.53% 67.36% 62.99% 54.35% 50.35% 48.46% 45.33% 41.71% 39.17% 36.74%

Total assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable 8.41% 9.03% 9.92% 11.09% 11.46% 11.11% 11.10% 11.74% 11.64% 11.91% 11.62% 11.51%

Accrued expenses 10.22% 11.81% 12.11% 13.05% 13.49% 12.70% 12.05% 12.39% 11.96% 11.59% 11.01% 11.22%

Current maturities of long‐term debt 1.07% 1.17% 0.82% 2.29% 3.03% 9.34% 9.30% 4.95% 4.57% 4.32% 4.17% 3.98%

Other current liabilities 1.61% 1.34% 0.93% 1.31% 1.35% 1.27% 1.27% 1.30% 0.97% 0.94% 0.92% 0.89%

Total current liabilities 21.31% 23.35% 23.78% 27.74% 29.33% 34.42% 33.71% 30.38% 29.15% 28.76% 27.71% 27.60%

Long‐term debt 41.70% 40.45% 35.06% 30.68% 27.05% 22.50% 20.74% 19.78% 18.29% 17.29% 16.66% 15.92%

Deferred tax liability 7.38% 4.89% 3.32% 3.19% 3.01% 2.62% 2.43% 2.34% 2.19% 2.01% 1.88% 1.76%

Employee benefit obligations 2.47% 2.15% 1.29% 0.93% 0.66% 0.43% 0.30% 0.22% 0.15% 0.10% 0.07% 0.05%

Other long‐term liabilities 2.92% 3.20% 4.73% 4.24% 4.38% 4.13% 4.12% 4.24% 4.20% 4.07% 3.97% 3.84%

Total long‐term liabilities 54.48% 50.68% 44.40% 39.04% 35.11% 29.67% 27.59% 26.58% 24.84% 23.47% 22.59% 21.57%

Stockholders' equity: 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Convertible perpetual preferred stock 0.33% 0.36% 0.33% 0.31% 0.29% 0.25% 0.23% 0.22% 0.20% 0.18% 0.17% 0.16%

Common stock and Additional paid‐in capital 25.41% 27.74% 28.49% 27.37% 25.88% 22.49% 20.91% 20.14% 18.81% 17.27% 16.18% 15.12%

Accumulated deficit (Retained earnings) ‐3.68% ‐3.36% ‐0.34% 2.34% 6.36% 10.54% 15.11% 20.33% 24.80% 28.29% 31.46% 33.78%

Accumulated other comprehensive income (loss) ‐0.57% ‐1.66% 0.12% 0.12% 0.11% 0.10% 0.09% 0.09% 0.08% 0.08% 0.07% 0.07%

Total stockholders' equity before noncontrolling interests 21.49% 23.08% 28.60% 30.14% 32.65% 33.38% 36.34% 40.78% 43.90% 45.82% 47.88% 49.13%

Noncontrolling interests 2.72% 2.89% 3.22% 3.09% 2.92% 2.54% 2.36% 2.27% 2.12% 1.95% 1.82% 1.70%

Total equity 24.21% 25.97% 31.82% 33.23% 35.57% 35.91% 38.70% 43.04% 46.02% 47.76% 49.70% 50.83%

Total liabilities and equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

XPO Logistics, Inc.

Weighted Average Cost of Capital (WACC) Estimation

Cost of Equity

Beta 1.628

Risk Free Rate 3.19%

Market Risk Premium 5.00%

Cost of Equity 11.33%

Cost of Preferred Equity

Dividend Yield 4.00%

Cost of Preferred Equity 4.00%

Cost of Debt

Pre‐Tax 5.01%

Tax Rate 22.93%

After‐Tax Cost of Debt 3.86%

Market Value of Equity

Share Price $81.03

Share Outstanding 114,900,000

Market Value of Equity $9,310,347,000

Market Value of Preferrred Equity

Market Value of Preferrred Equity $41,200,000

Market Value of Debt

STD & Current Portion of LTD  103,700,000$          

LTD 4,417,500,000$       

PV Operating Leases  1,692,552,466$       

Market Value of Debt 6,213,752,466$       

Market Weights

% Equity 59.81%

% Preferred Equity 0.26%

% Debt 39.92%

WACC 8.32804%

XPO Logistics, Inc.

Value Driver Estimation

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E

EBITA:

Net Sales 7,623.20 14,619.40 15,380.80 17,134.23 18,737.29 20,315.99 21,839.40 23,323.57 24,755.29 26,135.46 27,224.89 28,116.97

 ‐Cost of purchases and services 4,171.40 7,886.00 8,128.80 8,884.10 9,527.91 10,127.52 10,777.75 11,428.55 12,130.09 12,806.37 13,340.20 13,777.32

 ‐Direct operating expense 2,202.70 4,201.30 4,567.00 5,225.94 5,714.87 6,196.38 6,661.02 7,113.69 7,550.36 7,971.31 8,303.59 8,575.68

 ‐Depreciation and amortization 364.90 643.40 658.40 639.87 631.76 631.07 634.41 639.35 651.70 665.98 681.51 697.89

 ‐Costs of SG&A 912.80 1,400.60 1,403.40 1,713.42 1,920.57 2,133.18 2,347.74 2,565.59 2,784.97 3,005.58 3,266.99 3,514.62

 +Implied Interest on Operating Leases 15.23 93.76 91.33 84.78 84.48 85.43 87.37 90.01 93.12 96.53 100.12 103.83

EBITA (13.37) 581.86 714.53 755.68 1,026.65 1,313.28 1,505.87 1,666.40 1,731.28 1,782.74 1,732.73 1,655.30

LESS: Adjusted Taxes:

Provision for Income Taxes (90.90) 22.30 (99.50) 108.03 172.44 239.74 273.09 308.59 331.60 343.38 329.86 310.02

 +Tax Shield on Interest Expense 84.73 96.05 77.05 51.94 49.71 48.01 58.52 59.41 50.79 50.28 51.76 53.27

 +Foreign currency loss (gain) 17.52 (10.72) 15.61 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

 +Debt extinguishment loss 0.00 18.54 9.76 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

 +Tax on Other Expense (Income) (2.97) (2.45) (4.17) (6.11) (6.09) (6.16) (6.30) (6.49) (6.71) (6.96) (7.21) (7.48)

 +Tax Shield on Interest on Operating Lease 5.96 24.94 24.75 19.44 19.37 19.59 20.04 20.64 21.35 22.14 22.96 23.81

Adjusted Taxes 14.33 148.66 23.49 173.30 235.44 301.18 345.35 382.16 397.04 408.84 397.37 379.62

Deferred Tax Assets 113.60 2.70 7.70 7.70 7.70 7.70 7.70 7.70 7.70 7.70 7.70 7.70

Deferred Tax Liabilities 933.30 572.40 418.80 418.80 418.80 418.80 418.80 418.80 418.80 418.80 418.80 418.80

Plus: Change in Deferred Tax (DT) Liabilities 754.40 (250.00) (158.60) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

NOPLAT:  726.70 183.19 532.44 582.38 791.20 1,012.10 1,160.52 1,284.24 1,334.24 1,373.89 1,335.35 1,275.68

Operating Current Assets:

Normal Cash (lesser of actual or 2% of sales) 152.46 292.39 307.62 342.68 374.75 406.32 436.79 466.47 495.11 522.71 544.50 562.34

Accounts Receivable (net) 2,266.40 2,313.30 2,725.30 3,127.00 3,466.40 3,788.93 4,105.81 4,419.82 4,728.26 5,031.08 5,281.63 5,496.87

Other current assets 401.00 386.90 465.70 556.86 637.07 741.53 829.90 921.28 1,014.97 1,110.76 1,157.06 1,194.97

Operating Current Assets: 2,819.86 2,992.59 3,498.62 4,026.54 4,478.21 4,936.78 5,372.49 5,807.57 6,238.33 6,664.54 6,983.19 7,254.18

Operating Current Liabilities:

Accounts payable 1,063.70 1,056.30 1,250.70 1,456.41 1,592.67 1,777.65 1,910.95 2,099.12 2,227.98 2,482.87 2,586.36 2,741.40

Accrued Expenses 1,291.80 1,382.10 1,525.80 1,713.42 1,873.73 2,031.60 2,074.74 2,215.74 2,289.86 2,417.53 2,450.24 2,671.11

Other current liabilities 203.60 156.70 116.90 171.34 187.37 203.16 218.39 233.24 185.66 196.02 204.19 210.88

Operating Current Liabilities 2,559.10 2,595.10 2,893.40 3,341.18 3,653.77 4,012.41 4,204.09 4,548.10 4,703.50 5,096.41 5,240.79 5,623.39

Net Operating Working Capital 260.76 397.49 605.22 685.37 824.44 924.38 1,168.41 1,259.47 1,534.83 1,568.13 1,742.39 1,630.78

Plus: Property, plant, & equipment, net 2,852.20 2,537.40 2,663.70 2,654.23 2,684.27 2,745.04 2,828.08 2,925.62 3,032.77 3,145.73 3,262.34 3,381.70

Plus: PV of Operating Lesases 1,871.75 1,823.24 1,692.55 1,686.54 1,705.63 1,744.24 1,797.00 1,858.98 1,927.06 1,998.84 2,072.93 2,148.78

Plus: Identified intangible assets, net 1,876.50 1,534.70 1,435.30 1,274.90 1,120.90 973.00 832.70 702.40 577.31 457.23 341.95 231.28

Invested Capital 6,861.21 6,292.83 6,396.77 6,301.04 6,335.24 6,386.65 6,626.19 6,746.47 7,071.97 7,169.92 7,419.61 7,392.53

NOPLAT 726.70 183.19 532.44 582.38 791.20 1,012.10 1,160.52 1,284.24 1,334.24 1,373.89 1,335.35 1,275.68

Beg. Invested Capital 1,165.26 6,861.21 6,292.83 6,396.77 6,301.04 6,335.24 6,386.65 6,626.19 6,746.47 7,071.97 7,169.92 7,419.61

ROIC 62.36% 2.67% 8.46% 9.10% 12.56% 15.98% 18.17% 19.38% 19.78% 19.43% 18.62% 17.19%

Beg. Invested Capital 1,165.26 6,861.21 6,292.83 6,396.77 6,301.04 6,335.24 6,386.65 6,626.19 6,746.47 7,071.97 7,169.92 7,419.61

Spread (ROIC‐WACC) 54.04% ‐5.66% 0.13% 0.78% 4.23% 7.65% 9.84% 11.05% 11.45% 11.10% 10.30% 8.87%

EP 629.66 (388.21) 8.37 49.65 266.45 484.50 628.64 732.40 772.39 784.94 738.24 657.78

NOPLAT 726.70 183.19 532.44 582.38 791.20 1,012.10 1,160.52 1,284.24 1,334.24 1,373.89 1,335.35 1,275.68

CapEx  5,695.95 (568.38) 103.94 (95.73) 34.20 51.41 239.54 120.28 325.50 97.95 249.69 (27.08)

FCF (4,969.25) 751.57 428.50 678.11 757.01 960.69 920.98 1,163.96 1,008.74 1,275.94 1,085.67 1,302.76

XPO Logistics, Inc.

Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:

     CV Growth 3.25%

     CV ROIC 17.19%

     WACC 8.33%

     Cost of Equity 11.33%

Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E

DCF Model

NOPLAT 582.38  791.20  1,012.10  1,160.52  1,284.24  1,334.24  1,373.89  1,335.35  1,275.68 

ROIC 9.10% 12.56% 15.98% 18.17% 19.38% 19.78% 19.43% 18.62% 17.19%

CapEx (95.73) 34.20  51.41  239.54  120.28  325.50  97.95  249.69  (27.08)

FCF 678.11  757.01  960.69  920.98  1,163.96  1,008.74  1,275.94  1,085.67  1,302.76 

FCF 678.11 757.01 960.69 920.98 1163.96 1008.74 1275.94 1085.67 1302.76

Continuing Value 20,372.96

Periods to Discount 1 2 3 4 5 6 7 8 8

Discount Rate 1.083 1.173 1.271 1.377 1.492 1.616 1.751 1.896 1.896

PV FCF 625.98 645.09 755.72 668.78 780.25 624.21 728.86 572.49 10743.03

Value of Operating Assets 16,144.41$  

Add: Excess Cash 89.28$          

Less: Short‐Term Debt & Current LTI (103.70)$      

Less: Long Term Debt (4,417.50)$   

Less: PV ESOPS (46.63)$         

Less: Preferred Stock (41.20)$         

Less: PV Operating Leases (1,692.55)$   

Value of Equity 9,932.11$    

Shares Outstanding 114.9

Intrinsic Value as of 12/31/18 86.44$          

Cost of Equity 11.33%

Dividend Yield 0

Model Date 11/9/2018

Next FYE 12/31/2018

Last FYE 12/31/2017

Days in FY 365                

Days to FYE 313                

Elapsed Fraction 0.858

Intrinsic Value as of 11/09/18 94.77$          

EP MODEL

Economic Profit 49.65 266.45 484.50 628.64 732.40 772.39 784.94 738.24 657.78

Continuing Value 12953.34777

Number of Periods 1 2 3 4 5 6 7 8 8

Discount Factor 1.083 1.173 1.271 1.377 1.492 1.616 1.751 1.896 1.896

PV Cash Flows 45.84 227.06 381.13 456.50 490.96 477.96 448.38 389.29 6830.54

PV of Economic Profit 9,747.64$    

Add: Beg. Invested Capital 6,396.77$    

PV of Operating Assets 16,144.41$  

Add: Excess Cash 89.28$          

Less: Short‐Term, Debt & Current LTI (103.70)$      

Less: Long Term Debt (4,417.50)$   

Less: PV ESOPS (46.63)$         

Less: Preferred Stock (41.20)$         

Less: PV Operating Leases  $  (1,692.55)

Present Value of Equity $9,932.11

Shares Outstanding 114.9

Intrinsic Value as of 12/31/18 $86.44

Cost of Equity 11.33%

Dividend Yield 0

Model Date 11/9/2018

Next FYE 12/31/2018

Last FYE 12/31/2017

Days in FY 365                

Days to FYE 313                

Elapsed Fraction 0.858

Intrinsic Value as of 11/09/18 94.77$          

XPO Logistics, Inc.

Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending  2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E

EPS 3.04$              5.00$       6.95$       7.91$       8.93$      9.60$       9.94$       9.55$       8.98$          

Growth 64.39% 38.98% 13.77% 12.98% 7.48% 3.56% ‐3.95% ‐6.03%

Key Assumptions

   CV growth 3.25%

   CV ROE 9.42%

   Cost of Equity 11.33%

Future Cash Flows

     P/E Multiple (CV Year) 8.11

     EPS (CV Year) 8.98$          

     Dividends Per Share 0 0 0 0 0 0 0 0 0

     Future Stock Price 72.75$        

Discounted Periods 1 2 3 4 5 6 7 8 8

     Discounted Cash Flows 30.829$      

Intrinsic Value 30.83$          

Cost of Equity 9.42%

Dividend Yeild

Model Date 11/9/2018

Next FYE 12/31/2018

Last FYE 12/31/2017

Days in FY 365                

Days to FYE 52                   

Elapsed Fraction 0.142

Intrinsic Value as of 10/27/18 31.22719495

XPO Logistics, Inc.

Relative Valuation Models

EPS EPS 2016 Est. 5yrTicker Company Price 2018E 2019E P/E 18 P/E 19 EPS gr. PEG 18 PEG 19

JBHT J.B. Hunt Transport Svcs $106.72 $5.40 $6.41 15.01  16.65       22.2 0.68          0.75   

CHRW CH Robinson $89.61 $4.49 $4.96 19.96  18.07       13.7 1.45          1.31   

UPS UPS $109.51 $7.24 $7.85 15.13  13.95       11.1 1.36          1.25   

FDX FedEx $224.40 $17.41  $20.50  12.89  10.95       12.9 1.00          0.85   LSTR Landstar Systems $102.71 $6.06  $6.48  18.95  15.85       23.5 0.81          0.67   

Average 16.39  15.09       1.06         0.97   

XPO XPO Logistics, Inc. $81.03 $3.04  $5.00  23.8     16.2                   26.9  0.9            0.6      

Implied Relative Value:

   P/E (EPS18)  $            49.85 

   P/E (EPS19) 75.48$            

   PEG (EPS18) 86.45$            

   PEG (EPS19) 129.99$          

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol XPO

Current Stock Price $81.03

Risk Free Rate 3.19%

Preferred Dividend Yield 4.00%

Annualized St. Dev. of Stock Returns 36.54%

Average Average B‐S Value

Range of Number Exercise Remaining Option of Options

Outstanding Options of Shares Price Life (yrs) Price Granted

Range 1 815,022 12.66 4.31 57.22$         46,633,319$              

Total 851,022 12.66$         4.31 70.01$         46,633,319$              

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares):  851,022

Average Time to Maturity (years): 4.31

Expected Annual Number of Options Exercised: 197,453

Current Average Strike Price: 12.66$                   

Cost of Equity: 11.33%

Current Stock Price: $81.03

2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E

Increase in Shares Outstanding: 197,453 197,453 197,453 197,453 61,210 0 0 0 0 0

Average Strike Price: 12.66$                    12.66$                    12.66$                    12.66$                    12.66$                   12.66$                   12.66$                   12.66$                   12.66$                   12.66$                  

Increase in Common Stock Account: 2,499,754              2,499,754              2,499,754              2,499,754              774,924                ‐                         ‐                         ‐                         ‐                         ‐                        

Change in Treasury Stock 0 0 0 0 0 0 0 0 0 0

Expected Price of Repurchased Shares: 81.03$                    90.21$                    100.43$                  111.81$                  124.47$                 138.58$                 154.28$                 171.75$                 191.21$                 212.87$                

Number of Shares Repurchased: ‐                          ‐                          ‐                          ‐                          ‐                         ‐                         ‐                         ‐                         ‐                         ‐                        

Shares Outstanding (beginning of the year) 114,900,000 115,097,453 115,294,906 115,492,359 115,689,812 115,751,022 115,751,022 115,751,022 115,751,022 115,751,022

Plus: Shares Issued Through ESOP 197,453 197,453 197,453 197,453 61,210 0 0 0 0 0

Less: Shares Repurchased in Treasury ‐                          ‐                          ‐                          ‐                          ‐                         ‐                         ‐                         ‐                         ‐                         ‐                        

Shares Outstanding (end of the year) 115,097,453 115,294,906 115,492,359 115,689,812 115,751,022 115,751,022 115,751,022 115,751,022 115,751,022 115,751,022

XPO Logistics, Inc.

Key Management Ratios

Fiscal Years Ending  2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E

Liquidity Ratios

Current Ratio 1.10 1.13 1.20 1.18 1.26 1.33 1.47 1.70 1.88 2.03 2.20 2.29

Cash Ratio 0.11 0.14 0.13 0.17 0.25 0.50 0.62 0.71 0.85 1.00 1.15 1.27

Quick Ratio 1.10 1.13 1.20 1.18 1.26 1.33 1.47 1.70 1.88 2.03 2.20 2.29

Activity or Asset‐Management Ratios

Recievable turnover ratio 5.47 6.46 6.17 5.86 5.68 5.60 5.53 5.47 5.41 5.36 5.28 5.22

Total Asset turnover 0.61 1.26 1.23 1.31 1.35 1.27 1.27 1.30 1.29 1.25 1.22 1.18

Payable Turnover 5.61 5.30 4.77 4.76 4.79 4.69 4.71 4.61 4.64 4.42 4.47 4.41

Financial Leverage Ratios

Debt‐to‐Equity ratio 1.77 1.60 1.13 0.99 0.85 0.89 0.78 0.57 0.50 0.45 0.42 0.39

Debt Ratio 0.43 0.42 0.36 0.33 0.30 0.32 0.30 0.25 0.23 0.22 0.21 0.20

Times interest earned ratio ‐0.30 1.30 1.92 3.08 4.47 5.99 5.67 6.19 7.53 7.83 7.37 6.82

Profitability Ratios

Return on Assets ‐2.48% 0.57% 2.80% 2.74% 4.29% 5.39% 5.53% 5.91% 6.02% 5.77% 5.14% 4.52%

Return on Equity ‐11.55% 2.25% 11.20% 8.80% 13.28% 16.31% 15.97% 15.56% 14.48% 13.10% 11.13% 9.42%

Profit Margin ‐2.70% ‐2.48% 0.47% 2.19% 2.06% 3.09% 3.97% 4.20% 4.45% 4.50% 4.42% 4.07%

Gross Margin 27.79% 45.78% 46.65% 47.70% 48.15% 49.15% 50.15% 50.65% 51.00% 51.00% 51.00% 51.00%

94.77$       7.33% 7.83% 8.33% 8.83% 9.33% 9.83%

2.25% 112.72$        97.08$          84.05$        72.92$          63.39$          55.13$         

2.75% 121.24$        103.47$        88.93$        76.68$          66.32$          57.42$         

3.25% 131.85$        111.27$        94.77$        81.11$          69.73$          60.06$         

3.75% 145.42$        120.97$        101.89$      86.42$          73.75$          63.14$         

4.25% 163.40$        133.39$        110.76$      92.89$          78.56$          66.77$         

4.75% 188.36$        149.83$        122.10$      100.94$        84.42$          71.11$         

94.77$       1.428 1.528 1.628 1.728 1.828 1.928

4.10% 147.91$        135.74$        124.97$      115.35$        106.72$        98.92$         

4.40% 135.23$        123.77$        113.63$      104.58$        96.45$          89.11$         

4.70% 124.06$        113.23$        103.64$      95.09$          87.41$          80.47$         

5.00% 114.14$        103.87$        94.77$        86.66$          79.37$          72.79$         

5.30% 105.26$        95.49$          86.84$        79.12$          72.18$          65.91$         

5.60% 97.27$          87.95$          79.70$        72.33$          65.71$          59.72$         

94.77$       47.00% 47.50% 48.00% 48.50% 49.00% 49.50%

583 99.36$          98.83$          98.31$        97.78$          97.25$          96.72$         

633 98.12$          97.59$          97.07$        96.54$          96.01$          95.48$         

683 96.89$          96.36$          95.83$        95.30$          94.77$          94.25$         

733 95.64$          95.11$          94.59$        94.06$          93.53$          93.00$         

783 94.40$          93.87$          93.34$        92.82$          92.29$          91.76$         

833 93.16$          92.63$          92.10$        91.58$          91.05$          90.52$         

94.77$       15.19% 16.19% 17.19% 18.19% 19.19% 20.19%

2.99% 95.02$          96.74$          98.26$        99.62$          100.83$        101.92$       

3.19% 91.62$          93.29$          94.77$        96.08$          97.26$          98.32$         

3.39% 88.35$          89.97$          91.40$        92.67$          93.81$          94.84$         

3.59% 85.23$          86.80$          88.19$        89.43$          90.54$          91.53$         

3.79% 82.25$          83.77$          85.12$        86.32$          87.40$          88.37$         

3.99% 79.38$          80.87$          82.18$        83.34$          84.39$          85.33$         

94.77$       30.00% 30.50% 31.00% 31.50% 32.00% 32.50%

2.00% 104.50$        93.82$          83.15$        72.47$          61.79$          51.12$         

3.00% 105.31$        94.58$          83.86$        73.14$          62.41$          51.69$         

3.25% 105.51$        94.77$          84.04$        73.30$          62.57$          51.83$         

5.00% 106.93$        96.11$          85.29$        74.47$          63.65$          52.83$         

6.00% 107.73$        96.87$          86.00$        75.13$          64.27$          53.40$         

7.00% 108.54$        97.63$          86.71$        75.80$          64.89$          53.97$         

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