XPO Logistics Inc.

XPO Logistics Inc. (NYSE: XPO) is a global supply chain solution provider, which operates in two segments: Transportation and Logistics. The Transportation segment provides freight brokerage, last mile, less-than-truckload (LTL), full truckload and global forwarding services. The Logistics segment provides highly engineered and customized solutions, value-added warehousing and distribution, cold chain solutions and other inventory solutions.

Key Highlights 

• Strong guidance for 2021: On the back of the strong business and gradually improving macro scenarios, the management came out with strong guidance for 2021, where they expect adjusted EBITDA of USD 1.725 billion to USD 1.8 billion, an increase of 24% to 29% compared to the previous corresponding period. Furthermore, the free cash flow would be in a range of USD 600 million to USD 700 million after net capital expenditure of USD 475 million to USD 525 million.

• Spinning-off of its logistics business: Recently, the company announced its plans to spin off its logistics business as a separate publicly-traded company. The transaction would create two pure-play industry leaders: the spun-off company would be the second-largest contract logistics provider in the world, and the remaining company would be a global provider of less-than-truckload and truck brokerage transportation services. The transaction is expected to be completed in the second half of 2021, and both companies would trade on the New York Stock Exchange.

• Expanding network in the UK and Ireland: In January 2021, the company completed the previously announced acquisition of most of the contract logistics operations of Kuehne + Nagel in the UK and Ireland. The transaction expanded XPO’s logistics network in the UK and Ireland to 248 locations.

• Robust free cash flow: The company's free cash flow grew at a healthy CAGR of 26% since 2015. In Q4 2020, the company generated USD 193 million of cash flow from operations and USD 91 million of free cash flow. The full-year 2020 generated cash flow from operations stood at USD 885 million and free cash flow at USD 554 million. For 2021, the company expects free cash flow to be in a range of USD 600-700 million.

Source: Company

• Robust liquidity: As of December 31, 2020, the company had access to approximately USD 3.1 billion of total liquidity, including USD 2.1 billion of cash and cash equivalents and USD 1.0 billion of available borrowing capacity.

Financial overview of Q4 2020 

Source: Company 

• In Q4 2020, the company reported revenue of USD 4.6 billion, against USD 4.1 billion in the previous corresponding period. Healthy performance from the transportation segment and strong demand from e-commerce and other consumer-related verticals helped the company to report revenue growth.
• Operating income in Q4 2020 stood at USD 228 million, against USD 202 million in pcp, partially offset by higher SG&A expenses and higher direct operating expenses.
• Net income attributable to XPO in the reported quarter stood at USD 125 million, against USD 107 million in pcp, mainly due to higher revenues. 

Risks associated with investment

The risks involved with the business, which can affect the financial health and operations of the company include volatility in crude prices, low volume of goods, unavailability of workforce etc. 

Valuation Methodology (Illustrative): Price to Cash Flow 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The investments made by the company in technology in 2020 helped them to generate the highest revenue of any quarter in their history, and also helped in clocking healthy earnings and free cash flow of USD 91 million. Furthermore, on the back of the strong business and gradually improving macro scenarios, the management expect adjusted EBITDA to grow in the range of 24% to 29% compared to the previous corresponding period, while the free cash flows is likely to be in a range of USD 600-700 million, looks impressive. Recently, the company acquired the contract logistics operations of Kuehne + Nagel in the UK and Ireland, further enhancing their logistics network in the UK and Ireland to 248 locations, which would also help them in generating more revenue and free cash flows. Therefore, based on the above rationale and valuation, we recommend a “BUY” rating at the closing price of USD 119.49 on February 19, 2021. We have considered FedEx Corp, United Parcel Service Inc, J B Hunt Transport Services Inc, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Alpha and Omega Semiconductor Limited

Alpha and Omega Semiconductor Limited (NASDAQ: AOSL) is a designer, developer, and global supplier of and offers a wide range of power semiconductors, which includes a portfolio of Power MOSFET, IGBT, IPM, Power IC, and Digital Power products. 

Key Highlights:

• New Product launch: Recently, the group launched a new Type-C Power Delivery (PD) high voltage source protection switch capable of up to 28V absolute maximum voltage. The above product would support a slew of protection features, which includes true reverse blocking in a small solution footprint with an industry-leading on-resistance of 36mOhm. The above C protection switch includes added integration features that would eliminate the eternal current limiting resistor. 
• Improved Sequential performance: The group posted higher revenue, gross profit and improved operating income at USD 158.8 million, USD 48.7 million and USD 13.6 million, respectively, in Q2FY21, compared to USD 151.6 million, USD 42.5 million and USD 10.3 million, respectively in Q1FY21. Moreover, the group posted a net income of USD 12.9 million in Q2FY21, higher than USD 9.6 million in Q1FY21.

Q2FY21 Financial Highlights:

• AOSL announced its quarterly results, wherein the group posted revenue of USD 158.830 million, higher than USD 117.860 million in the previous corresponding period (pcp).
• Total operating expenses stood at USD 35.159 million, higher than USD 27.776 million in Q2FY20, primarily due to higher research and development costs (USD 15.423 million versus USD 12.147 million in pcp), and an increase in the selling, general and administrative expenses (USD 19.736 million versus USD 15.629 million in pcp).
• The group reported an operating income of USD 13.590 million, as compared to a loss of USD 3.370 million in pcp.
• The group reported a net income of USD 12.540 million, as compared to a net loss of USD 4.573 million in pcp.
• AOSL reported Cash and cash equivalents of USD 180.966 million, while total assets were recorded at USD 853.165 million.

Q2FY21 Income Statement Highlights (Source: Company Reports)

Risks: The operations might be impacted due to imposed restrictions by the government, change in consumer behavior which might lead to lower demand for the group’s product.

Stock Recommendation:

The group caters to one of the vastly growing industries i.e mobile phones segment and has reported stable operational performance in the recent past. However, the group’s operational performance remained lower as compared to the industry median. EBITDA margin and net margin during Q2FY21 stood at 16.9% and 7.9%, respectively, lower than the industry median of 21.6% and 11.7%, respectively. Moreover, the stock soared 200% and 273% in the last six months and nine-months, respectively. Meanwhile, on the valuation front, the stock of AOSL is available at a Price to Earnings Multiple of 16x on the next twelve months (NTM) basis, higher than the industry (Semiconductors & Semiconductor Equipment) average of 8.4x. Hence, considering the above facts, we recommend an ‘Expensive’ rating on the stock at the closing price of USD 38.89 on February 19, 2021. 

AOSL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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