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TRANSPORTCEO - 31/01/2019
XPO shares drop.
"Trucking Ridiculous, End of the Road"
Investment company publishes devastating report on XPO.
Spruce Point Capital Management published in December 2018, a report on XPO in which it accuses financial irregularities, which caused a collapse of the shares of the logistics operator XPO.
On December 12, 2018, Spruce Point Capital Management published a report regarding XPO, entitled ''Trucking Ridiculous; End of the Road''. The Spruce Point report asserted that a ''forensic investigation'' into XPO had revealed, ''financial irregularities that conveniently cover [the Company's] growing financial strain and inability to complete additional acquisitions despite repeated promises". Spruce Point reported that it had uncovered, among other issues, ''concrete evidence to suggest dubious tax accounting, under-reporting of bad debts, phantom income through unaccountable M&A earn-out liabilities, and aggressive amortization assumptions: all designed to portray glowing ''Non-GAAP'' results.The Spruce Point report further stated that ''XPO insiders have aggressively reduced their ownership interest in the Company since coming public, and recently enacted a new compensation structure tied to 'Adjusted Cash Flow Per Share' - defined in such a non-standard way that it is practically meaningless.'' Spruce Point also reported that ''in our opinion, XPO has used a nearly identical playbook from [URI] leading up to its SEC investigation, executive felony convictions, and share price collapse.''
Following publication of the Spruce Point report, XPO's stock price plunged $15.77 per share, or 26.17%, to close at $44.50 on December 13, 2018.
Spruce Point has been following XPO Logistics for years, a transportation and logistics roll-up founded by Bradley Jacobs, co-founder of United Rentals (URI) which collapsed in an accounting scandal during his leadership. Based on our forensic investigation, we believe XPO is executing an identical playbook to URI – resulting in financial irregularities that conveniently cover its growing financial strain and inability to complete additional acquisitions despite repeated promises. Given its unreliable and dubious financials, $4.7 bn debt burden, inability to generate sustaining free cash flow, and dependency on external capital and asset sales, we have a worst-case terminal price target of zero, informed the company in a press release.
XPO has completed 17 acquisitions since Jacobs took control in 2011 and deployed $6.1 billion of capital. Yet by our calculations, the Company has generated $73m of cumulative adjusted free cash flow in an expansionary economic period. In our view, this is indicative of a failed business strategy yielding a paltry 1.2% return on invested capital. XPO is dependent on external capital, asset sales, and factoring receivables to survive and is covering up a working capital crunch that can been seen by bank overdrafts – just like Maxar Technologies (MAXR). As credit conditions tighten, cost of capital increases, and XPO's business practices come under greater scrutiny (eg. U.S. Senate), its share price could swiftly collapse in Enron-style fashion, Spruce Point explained.
CEO Jacobs has surrounded himself with a web of associates from his United Waste Systems and United Rentals days. Two of his partners, Mike Nolan and John Milne, were convicted of accounting fraud. XPO's director G.C. Andersen recently employed Milne at his financial advisory firm during a time the company worked on private placements (potentially XPO's deals) and was sanctioned by FINRA. This wasn't disclosed to investors. XPO's audit committee director, Adrian Kingshott, has omitted from his bio his role in the distribution of note securities in the $700m Marc Drier Ponzi scheme, the company pointed out.
They conclude by giving their opinion on the matter, "in our opinion, XPO has used a nearly identical playbook from United Rentals leading up to its SEC investigation, executive felony convictions, and share price collapse. We find concrete evidence to suggest dubious tax accounting, under-reporting of bad debts, phantom income through unaccountable M&A earn-out labilities, and aggressive amortization assumptions: all designed to portray glowing "Non-GAAP" results. Additionally, we provide evidence that its "organic revenue growth" cannot be relied upon, its free cash flow does not reflect its fragile financial condition, and numerous headwinds will pressure earnings".
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