XPO: Top LTL Carriers Taking Freight Diversions From Yellow; Raising Valuation

On their second-quarter conference calls, XPO’s XPO less-than-truckload competitors Saia and Old Dominion reported experiencing a material uptick in shipments over the past few weeks, despite the otherwise sluggish demand backdrop (retailer destocking and soft industrial end markets). We suspect a meaningful portion of these gains reflect freight diversions from floundering LTL peer Yellow. Recall Yellow is facing a likely bankruptcy and we understand customers have been shifting freight to other carriers at a rapid pace.

Similar to our outlook for its peers, we expect XPO will gain a meaningful chunk of shipments that fit its acceptable yield profile as Yellow continues to bleed market share. The risk would be that XPO chases low-yielding freight, but considering its execution progress over the years, we are assuming it remains disciplined. Lifting our confidence is XPO’s recent hiring of trucking veteran and former Old Dominion SVP of operations, Dave Bates, as COO.

Overall, due to seemingly meaningful incremental freight opportunities, we tempered our forecast tonnage declines for 2023 and boosted the volume recovery we’ve been baking in for 2024. Share gains and lane-density benefits also give us greater confidence in a solid margin rebound next year. As a result, we are boosting our DCF-derived fair value estimate for XPO to $44 per share, from $40. We expect greater color surrounding XPO’s potential freight diversions from Yellow when it reports second-quarter results on Friday Aug. 4.