Krause Fund Research Fall 2018

Industrials XPO Logistics, Inc. (NYSE: XPO)

Recommendation: BUY November 9, 2018

Analysts Drew Rasmussen Andrew Straight Current Price $81.03 [email protected] [email protected] Target Price $91 - $97 Erik Miller Joseph Tomczuk [email protected] [email protected] XPO’s Future is Bright

Company Overview • Revenue growth in both the transportation and logistics XPO Logistics, Inc. (NYSE: XPO) operates in the segment show major upside in the future: XPO’s revenue has transportation and logistics industry in the United States, major upside potential in the future, projecting to grow 10% in Europe and Asia. XPO is the fastest growing company in its 2018. They have put an immense amount of focus into growing industry. They operate about 63% of their business in the last mile services in North America as well as expanding last transportation segment and about 37% of business in the mile services into Europe. They are also the number one logistics segment. XPO has put an immense amount of provider of large truckload services in Europe. The Logistics focus on increasing their share in the logistics segment of segment is looking to have major growth as they take their business model. XPO’s total revenues grew 5% in advantage of increasing world-wide e-commerce growth, and a fiscal year 2017 to $15.543 billion, and pre-tax income grew focus on being a one stop shop for their customers providing 144% to $260 million in 2017. both transportation and logistical services. • Focus on technology and innovation gives XPO a Stock Performance Highlights competitive advantage over competition: One of XPO’s top 52 week High $116.27 corporate strategies is to be the leader in their industry of 52 week Low $71.36 technology development and innovation. They plan to invest Beta Value 1.826 over $450 million towards technology in 2018. Robots and Average Daily Volume 1.36 m artificial intelligence have already become a part of everyday operations. Share Highlights • Brand Image and market position creates major upside Market Capitalization $9.96 b potential: XPO is among the top transportation and logistics Shares Outstanding 114.9 m providers in North America and Europe. In a tightening worker Book Value per share $32.63 supply environment, they have still received over 80,000 EPS (FY 2017) $0.87 monthly job applications this year. P/E Ratio 21.40 • Abundance of FCF creates potential for M&A activity as Preferred Dividend Yield 4.00% 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 Company Performance Highlights cushion in the case of a recession as well as potential for future ROA 2.80% M&A activity. ROE 11.20% • E-commerce growth allows for tremendous logistics Sales $15.54 b upside: E-commerce customers account for XPO’s largest portion of revenue. E-commerce is projected to grow at a CAGR Financial Ratios of 9.6% from 2018 – 2022. Current Ratio 1.20 One Year Stock Performance Debt to Equity 1.13

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with the unemployment rate approaching record lows of Economic Outlook 3.7%, paired with an increasing labor force participation rate. It is no surprise that economic growth and Real Gross Domestic Product (GDP) development is a pillar of the current Trump administration policy. Over 2 million jobs were created in 2017 alone, and Real gross domestic product (GDP) is an inflation-adjusted the implementation of the Tax Cuts and Jobs Act of 2017 reinforce commitment to a continuous improvement of the measure that reflects the value of all goods and services U.S economy. We project that trade uncertainties and produced by an economy in a given year. Real GDP is widely inconsistencies within the market will fade over the long run. recognized as a leading indicator of economy growth. Unlike Long term growth will be a byproduct of the foundation built nominal GDP, real GDP accounts for fluctuations in price over the last few years and optimistic workforce that’s level and delivers a more precise figure of economic growth. 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 Source: Bureau of Economic Analysis influential in an economy to promote or cool down growth because of its direct impact on the cost of borrowing. The Strong GDP growth over the past year and a half has spurred U.S has experienced a record low interest rate environment new investment opportunities, increased consumer the previous 10 years due to an attempt to promote growth confidence, and dropped unemployment to record lows and expansion within the economy post-great recession14. In within the U.S economy. Even with equity markets recently 2018 alone, the Federal Funds Rate (FFR) increased three experiencing some unsettling volatility, fundamentals of the times to a current benchmark of 2-2.25%, with current economy remain strong with GDP growth north of 4% and signals pointing towards a fourth increase of 25 basis points 3% in Q2 & Q3 2018 respectively. The Industrials sector is before year end14. Changes in the FFR have a primarily direct very cyclical and especially sensitive to changes in the overall relationship with the 10 year Treasury note, which is market. The Industrial Production Index (IPI) measures the commonly used as the risk-free-rate for borrowing when real production output of manufacturing, mining, and analyzing different investment opportunities. utilities; demonstrating the overall health of the Industrials sector. Historically, growth in the IPI has had a positive correlation with real GDP growth.

Source: St. Louis Federal Reserve

Source: St. Louis Federal Reserve Due to the nature of business and material & equipment utilized within the Industrials Sector, companies rely heavily Real Gross Domestic Product Outlook on borrowing to fund much of their capital expenditures. The Fed has been relatively transparent about their plan of We anticipate Real GDP to increase by 3.0% and 3.25% in the gradually increasing rates until a neutral level—which Fed short and long-run, respectively. This is a reflection of the Chair Jerome Powell has mentioned are not near a neutral strong fundamental drivers in the market in addition to level, yet. While President Trump has been vocal about his recent external factors mitigating potential risk looking personal negative view on the potential for continued future forward. Current employment data supports our hypothesis 2 rate hikes, the Fed does not show any sign of altering their future growth projections. We believe that because stance going forward. consumers have weathered equity market volatility and political uncertainty the past two years with very little We project that rates will increase once more in 2018, and impact on consumer confidence, this outlook remains three times in 2019 because of continued strong strong. fundamentals and growth in the economy. While some may interpret interest rates increasing as a negative, we Tax Considerations recognize that it is necessary to offset potential inflation and other adverse effects of a thriving economy. We believe that In December of 2017, the Tax Cuts and Job Acts (TJCA) was markets have already included these future rate hikes into signed into law and has become the largest tax overhaul valuation, and that future overall capital expenditures will since 1986. The TCJA has introduced a number of changes to not decrease dramatically. the way that business are taxed. In one of the largest changes, the TCJA will reduce the business sector’s tax Consumer Confidence liability by the changing of business tax rates and the business tax base. 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 Source: Tax Foundation, Taxes and Growth Model, Nov 2017 households by the Conference Board. The CCI is based on benchmark score of 100 from the year 1985. As of October In the short run, GDP is projected to grow roughly 0.44% 2018, the CCI stands at 137.9, the highest score of all time2. above baseline projections as firms utilize the immediate The Michigan Consumer Sentiment Index is conducted by expensing of short-lived assets and lower tax rates1. This the University of Michigan through a survey of 500 looks to promote capital expenditures, which promotes households, a very similar process to the CCI. The MSCI economic growth. This accelerated initial growth will likely reflects roughly the same data as the CCI and accounts for reduce in a few years due to the temporary nature of many outliers by removing the most and least favorable replies. of the provisions. However, while economic growth is The graph below depicts the MSCI, and similarly to the CCI, borrowed from the future, the plan still expects economic the index is near all-time highs. 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. Source: St. Louis Federal Reserve

We can expect consumer confidence to remain high due to a Fuel Prices large degree of optimism surround the soaring markets. While some believe that a market correction will occur in the Fuel and oil prices are key factors in the economy and near future, the recent consumer confidence index surveys especially the Industrials sector, due to the impact that fuel have displayed no sign of this, proving consumers’ optimistic has on both manufacturing and production costs. The lower approach—this forward confidence is a key driver for our the price of oil, the lower the cost of manufacturing goods,

3 which in turn will improve a companies’ overall profit overheating when necessary. The Trump Administration is margins. A lower oil price also results in lower gas prices approaching trade negotiations with a different attitude and which lead to consumers spending more on goods and technique than past leaders. We believe that while this may services instead of gas. have caused a potential negative effect on certain areas of the economy in the past, those behaviors have not and will While oil prices have remained fairly steady over the last few not lead to long-term disaster. We also believe that the years, barrel prices have started to see a slight increase. In recent midterm election result of a split congress and senate 2018, the barrel price of WTI crude oil has remained within a will mitigate future unexpected volatility that may have $60-$72 range and is currently priced at $60.19 per barrel. 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 Analysis

Industry Description Source: St. Louis Federal Reserve

XPO Logistics operates as a leader in the Transportation & The graph above also shows what some researchers believe, Logistics industry. Transportation comprises roughly 63% of that crude oil will soon return to its historical average price XPO’s revenue with a focus in freight brokerage, last mile, of $75-$100 a barrel, despite reaching a low price of $26.55 less-than-truckload (LTL), full truckload and global in 2016. In the short-run this will put pressure on the forwarding services. XPO has committed to having a global Transportation industry, but we do not believe it will have a presence in their transportation operations, currently significant impact because prices will just be reverting back working in over 30 countries. Transportation as an industry to their “normal” level; the last two years have acted as a primarily follows the overall economy in terms of bonus for the industry. Due to factors such as oil supply, performance and growth. Logistics makes up the remaining natural disasters, and other world events however, oil prices 37% of revenue for XPO in which they provide a wide range could rise exponentially within the next 20-50 years, of contract logistics services and other inventory solutions. especially due to supply shortages. This uncertainty poses a As of 2017, Transportation and Logistics jobs comprised major threat to companies that rely on oil, but we are roughly 2.3% of all U.S jobs, with favorable growth estimates starting to see a shift in company expenditure allocation looking into the future. towards research & development within the Industrials

Sector. Both XPO Logistics and The Boeing Company have Recent Developments and Industry Trends put forth efforts to increase their fuel capacity through more environmentally safe and efficient products and There is much optimism within Transportation & Logistics improvements which will help both the bottom line and due to strong international demand paired with many environment. It is the dedication to innovation and exciting innovation opportunities. From 2008-2017, the T&L development that has launched XPO to become an industry industry boasted a 12.7% growth rate and created over leader within this space, and we expect that commitment to 416,316 jobs, surpassing the overall economy growth rate of continue to pay off in the future. 5% . The Transportation & Logistics industry is expected to 6 carry this momentum forward, projecting an 8% growth rate Capital Markets Outlook and creating roughly 280,000 more jobs through 202212. This optimism is derived from the ability to cover more miles at a Based on the information above and current economic lower cost and the potential for innovative technologies conditions, we believe that the future capital markets allowing expansive capabilities for companies currently outlook is positive. The U.S economy has taken advantage of operating in this space. These future opportunities, primarily opportunities such as new tax laws, increased governmental driven by Third Party Logistics, seemingly mitigate the spending and record high consumer confidence that are negative effects that have come forward recently with contributing towards a strong and stable GDP growth. increased driver regulatory requirements, environmental Potential trade conflict and inflation may pose threats in the awareness initiatives and wage pressure from low future. With that being said, the Fed has followed through unemployment. on their commitment to carefully monitor interest rates and taking appropriate action to mitigate the economy 4

Trends: are on pace for over a million job applications this year. Because of this reflection of a strong brand image, we do not Unemployment- Wage Pressure believe that wage inflation will have a significant impact on

the overall operations at XPO. The unemployment rate is generally viewed as a laggard representation of overall economic health. With help from Increased Trucking Requirements- Safety over 2 million jobs created in 2017, the current 3.7% unemployment rate is approaching a record low level for this The Compliance, Safety and Accountability Initiative (CSA) past half-century. This paired with an increasing labor force was introduced into the Trucking industry to prevent and participation rate demonstrates that the strength of the U.S reduce road accidents and risks of incidents for truckers. The economy is very strong. 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 Source: Econoday involves green-house gas emission regulations. The EPA and Department of Transportation’s National Highway Traffic However, while this can certainly bring optimism and Safety Administration have joined together to set emissions reassurance for representing a strong underlying economy, and fuel efficiency standards for commercial trucks. By 2021, concerns may arise over some of the negative effects that the hope is to eliminate fuel inefficient models13. low unemployment may have. Low unemployment over an extended period of time poses the risk of inflated wages. The last proposal mandated that an employee must be Increasing wages throughout the economic universe is a required to satisfy a 34-hour break upon driving 73 hours in threat to the Industrials sector as employees are fleeing to a 7-8 day span13. In order to satisfy the requirements of the less labor-intensive jobs that now have comparable proposal with congestion of longer drive times and restricted compensation packages in other areas. work hours has shifted a greater emphasis towards Logistics. The combination of these initiatives are a part of a While XPO Logistics has been experiencing over 80,000 job progressive approach towards increasing safety on the applications per month globally, the same is not being roads, and doing so in a more environmentally friendly way. reflected throughout the industry. It is no secret that there is a record level Trucker shortage, estimating over a 50,000 Technology- Big Data, Changing Demands driver deficit7. To make matters worse, the American Trucking Association predicts that 890,000 new drivers will Technology and innovation have dramatically altered the be needed through 2025 to meet rising demand. In order to way the world works, especially in regards to consumer attract and retain top talent in a limited pool of candidates demands. Consumers want things faster, and don’t want to that have easier accessibility to flee the industry, companies pay more for it. Consumers also want transparency in the raise wages to ensure stability in their workforce. As recently delivery process. Whether it’s checking the status of their as last October, Amazon pledged to raise their minimum goods, controlling delivery location or timing, shipping has wage to $15/hr, and with additional hopes to “encourage become more complex and with a higher demand. In the major competitors to do the same5”. 2016 average earnings past, a single truck would move a large load from for a worker in the T&L industry fell just below $70,000. The distribution to the retail center. Now, the same volume of sustainability for many small-cap firms to accommodate goods may travel last mile on numerous trucks that could be these costs and wage increases in addition to difficulty half full, but rapidly decreasing the overall delivery time to finding new employees does not forecast well. XPO has the consumer. These increasing demands and expectations positioned themselves very competitively in the market have evolved to “Industry 4.0”. Industry 4.0 is a term used to through great brand marketing and recruiting efforts, they describe the newest technological advancements in

5 manufacturing where a majority of parts of the supply chain indication of slowing down with the onset of India displaying system are digitally unified. This interconnection allows for promising e-commerce sales and development. The increase more efficient products that are made less expensively, and in e-commerce sales has contributed to a greater demand with improved quality16. for last-mile shipping, in which third-party logistics companies primarily coordinate the process. This is an Improvements to technology have also paved the way for Big example of the power of e-commerce and how it directly 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. Source: IBIS World – Third Party Logistics productivity impacts both transportation and logistics companies Catalysts for Investment positively. XPO Logistics benefits from this situation because E-Commerce, Freight Transportation Growth they provide both logistical and last-mile transportation services for consumers. There is much anticipation that Ecommerce: transportation companies will have to develop a stronger logistics line of business, or will have to start outsourcing Transportation & Logistics is in the center of a transitioning their transportation logistical operations onto third-party environment. E-commerce sales in the global economy have logistics providers as they try to simplify their supply chain experienced superior growth and look to continue to grow at and focus their core business. an increasing share of overall retail sales. Over the next 5 Freight Transportation: years, E-commerce sales are projected to increase at an annualized rate of 13.4% . This is a core foundational pillar 12 The Cass Freight index report is a measure of domestic for optimism within the T&L industry—many projections for industry growth are reliant on a continued strong E- freight volume and expenses. The index currently includes commerce development. $25 billion on in freight transactions. The most recent report, July 2018, shows an 8.4% year over year change in shipment volume15.

Source: CBRE Source: Cassinfo.com In a time where globalization is becoming more accepted This is an important index because it shows the overall and trade continues to expand overseas, the East Asia-Pacific freight shipment levels in the U.S. Not only is this a good region has emerged as a primary driver of e-commerce sales. economic indicator, but it provides validity for the Retail e-commerce sales in East Asia-Pacific grew 31.1% in Transportation industry as a whole, with data to support 2017 to $1.349 trillion12. This growth does not show any growth or stagnation in this line of business. Freight 6

Transportation growth has been an area of opportunity for out from their specialized service in order to remain many companies within this industry. The East Asia-Pacific competitive16. 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 Source: Yahoo! Finance brokerage revenue grew 18% in part to the new C .H Robinson: development of XPO Connect19. XPO has also executed on last-mile delivery services in Europe to catch some of the C.H Robinson is one of the largest third-party logistics growth in the global market. companies in the world, providing freight transportation and logistics solutions to all sizes, and a wide variety of Markets and Competition industries. They have put a large emphasis on global expansion in recent years to get ahead of competition. Environment: C.H Robinson plays as the best comparable to XPO. They operate in very similar areas and have relatively similar XPO positions itself as a one stop shop providing exceptional fundamental ratios. They have very similar business models, quality service to exceed the needs and demands of their each capitalizing on both transportation and logistics customers. They are heavily invested in both transportation services while placing a great emphasis on investing in and logistics segments of the business. XPO boasts and research and development for premier technology. frames themselves as a technology leader, allowing them to Fundamentally speaking, C.H Robinson has been able to utilize an immense variety of capabilities and resources to achieve a greater market share than XPO while earning a solve very big and complex logistical implementations. Most more efficient EPS and greater net Income—with nearly one- of the competitors in this market are specialized to just one fourth of the debt level. C.H Robinson is clearly in the or a couple avenues within the respective industries, which mature phase of operations and has been available in the puts XPO at a competitive advantage for the consumer. public equity market since 1997 (14 years longer than XPO).

Competition: Landstar Systems:

Mix strategy has taken the lead for what consumers are An asset-light provider of integrated transportation looking for in the transportation & logistics industry. As management solutions, Landstar Systems operates in the described above, consumers are expecting greater customer Transportation, Logistics, and Insurance segments. service, quicker delivery times, all at a lower cost. XPO is Transportation services offered are primarily located in already ahead of this trend because they not only offer both North America. The insurance segment consists of Signature services, but are industry leaders in both. As the relationship 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). Source: Masters of Logistics J.B Hunt: between transportation and logistics continues to become even stronger, other companies are going to have to branch A highly regarded surface transportation, delivery, and logistics company that provides services in the U.S, Canada, 7 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:

Source: Yahoo! Finance It was mentioned earlier how Amazon’s increased minimum wage is putting pressure on the Industrials sector. Not only is revenue number continues to impress, and from the degree Amazon effecting the whole industry indirectly, their recent of how fast they became an industry leader, we have plans to enter into the transportation & logistics space confidence in management to continue making great serves as a threat to current companies. Amazon currently investment decisions going forward. S&P & Moody’s credit has 258 operational facilities in the United States, and agencies both upgraded XPO’s credit rating to BB and Ba2 another 486 distributed world-wide. They also have 32 scores. This vote of confidence comes from XPO’s consistent Boeing 767-300s, in addition to north of 300 power units . 3 strong financials, forward thinking investment initiatives, While these numbers would not currently support a giant in and their commitment to paying down debt. Paying off debt the industry, Amazon has the capital to grow these areas has been a major point of emphasis expressed by when/if focused upon. The concern of entry is legitimate, as management. XPO currently has the lowest EPS and highest steps are being made to jumpstart this agenda: According to P/E ratio in the comparable group, and is higher than the the Amazon careers page, currently 5% of their workforce is average 16.63 ratio for the industry. This could be an dedicated to transportation and logistics jobs across 23 indicator that the stock is overvalued, due to the differences. countries . Job opening descriptions are tailored towards 3 When thinking about these three comparable companies, we experienced professionals within the industry, specifically air have to remember how XPO provides more services to the shipping—attracting talent from current competition. customer, acting as a one-stop-shop for both Transportation Forward-thinking innovative ideas/products have also & Logistics services. They are ahead of the curve for Mix surfaced regarding Amazon’s potential to break into the strategy, which is important when thinking long-term in this industry. Such services include drone delivery, Amazon competitive space. J.B Hunt does not have the same global lockers, remote door access, and more. It not a question of reach, nor does C.H. Robinson provide the same amount of if, but of when, Amazon will fully dedicate to entering the capabilities that XPO does. As these competitors focus on industry, and what impact that will have on current growth in those respective areas, XPO can remain attentive companies. towards meeting customers’ demands, servicing them at a high level, while continuing to explore and invest in Analysis: technological innovation at a high level.

XPO faces threats from the competitors above, as they Porter’s 5-Forces Analysis continue to expand in both industries to keep up with customer demand. The recent trend above reported in the Threat of New Entrants: Medium 26th annual study of Logistics and Transportation shows how competitive it will be to obtain and hold market share. XPO’s Logistics is an attractive industry to enter because there are competition primarily focuses on CH Robinson, and J.B. Hunt no licensing requirements or resource constraints that are Transport Services11. They all relatively share the same substantial for companies to enter. There is no dominant business model and expansion aspirations, in addition to figure within the industry, which explains why many similar Market Cap. One might assume during an eye test companies are currently fighting for market share in a highly that XPO does not have as strong fundamentals with Net concentrated environment. It is through effective pricing Income levels less than half of the competition, and Total strategies that companies can potentially enter the market, Debt currently at a similar multiple. This is not of concern to as customers are more inclined in this industry to seek lower us due to the fact that XPO is still a relatively new company prices. That being said, great brand recognition and highly and is completing the growth phase of their life cycle. XPO’s effective solutions/products are requirements in order to be 8 successful in the industry. So while it may not be excessively Bargaining Power of Suppliers: Low hard to enter the market, the difficulty comes with trying to Suppliers do not have much bargaining power due to the remain above water through competitive advantages in an industry being so highly competitive with many companies. extremely competitive space. Transportation provides a Similar to their customers, logistics companies have many more difficult barrier of entry to the market. A company suppliers to choose from, so they can afford to switch must have access to a tremendous amount of capital for suppliers depending who offers the lowest prices for their start-up costs. Additionally, having a strong logistics segment parts and services. Price structure is critical for suppliers, as is essential for success in this industry which can be attained variables within the industry are primarily dictated by the through in-house operations or outsourcing. Licensing and market (fuel prices). Finding a competitive advantage other governmental regulations also add difficulty with time and than overall capabilities, and marketing to that perception, is compliance hurdles to jump when thinking about entering a difficult task in Transportation & Logistics. Truly the best the transportation market. combination of both product service and customer service

should allow for success. Threat of Substitutes: Medium

It is hard to replace the current methods of transporting Competitive Rivalry: High goods and products, which include trucks, trains, ships, and Competition is very high due to the increasing demand for planes. There are several different types of vehicles available third party logistics services and the respective low for use and competitors will continue to try and find the concentrated market. Competition stems through price, most efficient ways of travel delivery. Current laws and customer service, service(s) provided, efficiency, and regulations surround trucking could pose threats for the reliability. Good brand reputation and recognition is industry and increase the cost of operations16. As extremely crucial in order to remain successful in the competition continues to heat up in the near future, industry because the service provided can be duplicated companies will have to decide whether to outsource or keep without tremendous difficulty—larger logistics companies logistical capabilities in-house. Autonomous vehicles and can take advantage of taking over entire logistics operations other innovative transport pose as a real possibility for entirely from their customers. The primary competition trucking in the future, especially as Amazon eyes to enter within the industry results from other in-house operations of customers. Many in-house companies want to leverage their the market3. If autonomous vehicles do become industry own networks and not rely on other transportation service standard 15-20 years into the future, this will change the providers. However, this can also make operations more whole landscape of how transportation and logistics expensive and could potentially reduce flexibility that could companies operate. be gained from simply hiring other companies. There is anticipation that companies may start to outsource their Bargaining Power of Customers: High logistics operation in the long run as competition increases Customers have a high bargaining power because there are with newer technological innovation capabilities. multiple logistics companies in the market that could meet a Bottom Line: majority of their needs. Third Party Logistics has a low level of market share concentration. In 2018, the four largest Current trends provide opportunity for companies to enter industry players are expected to account for less than the market with innovative operations in a current changing 15.0%12 of industry revenue. The biggest factors for landscape. Evolution of the global economic growth rate customers are: price, customer service, service(s) provided, and e-commerce illustrates the integration of economies efficiency, and reliability. Increasing customer expectations around the world. Consequently, to deliver goods, paired with a large supply of services available allow the companies must adapt outdated methods to meet new customer to buy the cheapest and fastest service available. If customer requirements. Companies in this industry must a current logistics company is not meeting their customer’s develop new methods to increase efficiency and current time demands, or their price inflates enough, there effectiveness in order to gain a competitive advantage in the are several alternatives for the customer to seek out. This is long-run. Strong brand recognition and reliability are a just another reason why strong brand recognition and necessity to compete in this industry. An emphasis on reliability are absolutely crucial for success in this industry. 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

9 and have access to the latest technology in order to remain their transportation business. Lastly, customer service has competitive. We predict that XPO will remain a leader in the been an essential part of their corporate strategy as they are competitive environment because they have been able to able to provide innovative solutions for any size company capitalize on logistics growth through an innovative with any variety of supply chain or transportation needs. approach to providing next-level technological services. Financial Summary Their significant continued investment to research and development has put them ahead of the curve in providing a XPO’s earnings for the most recent 3rd quarter of 2018 came leading transportation and logistics service, contributing in at $100.8 million, compared to $57.5 million in quarter 3 towards a strong brand name and recognition. of 2017, and their diluted earnings per share was $0.74 compared to $0.44 in 2017. Though they missed analyst Company Analysis expectations by 9 cents per share in Q3, CEO Bradley Jacobs acknowledged the results by referencing a $15.6 million

Business Summary write off due to a customer bankruptcy19. Revenue had an 11.5% year-over-year increase to $4.34 billion. This increase XPO Logistics Inc., based out of Greenwich, CT, operates in was largely contributed by logistics’ revenue increase of the transportation and logistics industry with their strongest 13.1% to 1.52 billion. CEO Brad Jacobs attributed this presence in North America, followed by Europe and Asia. tremendous growth to rising demand for e-commerce Their revenue streams come from both a transportation and logistics as well as consumer packaged goods Revenue in logistics business segment. Within their transportation 19. the transportation segment increased 10.5% to $2.85 billion segment they offer a variety of different services to extend for the quarter. High demands in North America for last mile, their reach to all types of different customers. These services 12% increase, and freight brokerage, 17.5% increase, include: freight brokerage, less-than-truckload (LTL), last contributed largely to such growth. XPO financial targets for mile, full truckload, and global forwarding transportation. 2018 consist of an EBITDA of $1.585 billion a year-over-year Within the logistics segment they offer a variety of services, increase of 15.7%. Management also expects 2017-2018 including: distribution, warehouse management, cumulative free cash flow to reach $1 billion . This strong manufacturing, e-commerce fulfillment, and personalization 19 free cash flow estimate provides stability for the company related supply chain management services. As of October and represents a growing foundation looking forward. 2018 they have 1,529 locations in 32 different countries with more than 98,000 employees19. Services and Markets

Corporate Strategy Services are provided to customers of all sizes across many different industries. Customers range from start-ups to XPO’s corporate strategy involves leveraging its large Fortune 500 companies, with 10% of XPO’s revenue being network of professionals, developing and advancing attributable to their top 5 customers. Retail and e-commerce technology, and managing its physical assets in order to customers accounted for 29% of revenue, while food and provide customers with efficient and effective supply chain beverage accounted for 16% of revenue in 2017 . XPO and transportation services. With expertise across such a 18 minimizes their risk by stretching across a variety of different large variety of supply chain management services, it is sized companies in important to their strategy that they effectively market their many different professionals to new and existing customers. Advancing industries technology has been another huge focus for XPO as they are 18. Transportation investing $450 million in technology research in 2018.11 XPO services are widely recently added an augmented reality transportation service. reliant on the North This service allows customers to see a virtual image of their American and purchased large home furnishing product in their home in European markets, hopes to lower product returns11. XPO has also just added while the logistics 5,000 robots across their production warehouses that assist segment is reliant employees in picking orders11. XPO’s heavy focus on on North American, innovation and technology is what differentiates them from European, and their competitors and makes them desirable to potential Asian markets Source: XPO 2017 10K customers. Another huge focus for XPO is to optimize existing customer’s services by cross-selling logistics with

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Transportation Segment 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.

Source: XPO 2017 10K S.W.O.T Analysis

Transportation is XPO’s most comprehensive segment. It Strengths is made up of five different services: less-than-truckload XPO has a strong international brand portfolio in (LTL), freight brokerage, last mile, full truckload, and Transportation & Logistics. They are averaging roughly Global forwarding. LTL is the largest segment in terms of 80,000 job applications per month in 2018 which is a revenue for XPO and they are the second largest provider testament to their sound brand image in a tough current globally. They use owned physical tractors and trailers to environment. XPO is the second largest contract logistics deliver this line of service to 99% of zip codes in the provider in the world, second largest global freight United States with services also expanding across Canada brokerage provider, largest provider of last mile logistics and Europe19. Freight brokerage is XPO’s second largest for heavy goods, second largest provider of less-than- segment and they are also the second largest provider truckload transportation, and third largest provider of globally. They have a large global freight network that intermodal services They also have both contracted includes ocean, air, ground, and cross-border 19. and brokerage capabilities for transportation services. transportation which has proven to be very attractive to This allows the capacity and flexibility to provide the best large industrial retailers. While Last Mile services only solutions for customer demand. XPO currently owns or make up 8.84% of transportation segment revenue, it is leases 10,000 53-ft containers and 5,000 chassis . A XPO’s fastest growing segment with 17% growth in 2017. 19 focus on technology has streamlined and ensured This growth is mainly funded by the booming e- quicker, more efficient services to its customer. Lastly, commerce industry. XPO has recently just completed being a single provider for both transportation and their goal of owning 85 last mile hubs strategically placed logistics services allows XPO to attract more customers throughout the U.S.—this provides access/availability to and allows the opportunity to provide more service to service roughly 90% of the U.S population in a timely these customers. This is reflected in their tremendous manner. Full truckload services only operate in Europe, revenue growth. where they are the leading provider. Management has no plan to expand full truckload operations into North Weaknesses America due to low margins and a saturated market19. Global forwarding services are asset-light and mainly No company in this industry is immune to external consist of cross-border air and vessel contracted economic factors. Due to wage inflation and a shortage transportation. of truck drivers, the industry has seen an increase in driver compensation and has had difficulties attracting Logistics Segment and retaining drivers. This has led to increased costs in Logistics makes up the remaining portion of XPO’s recruitment, wages, and underutilization of truck freight, revenue at 37%. XPO is currently the second largest leading to potential revenue loss7. Even with mitigating contract logistics provider worldwide. Logistics services dynamics, XPO has felt some of this compression. XPO include: value added warehousing and distribution, cold has also seen an increase in customer trade receivables,

11 which has the potential to have a negative effect on the ineffective and gave us an inaccurate share price because company’s cash flows. This has been a trend the past XPO does not currently pay a dividend, nor do they give three years, with net receivables increasing by nearly 2% guidance on any potential future dividend payments. The from 2016 to 2017. relative valuation model uses competitor P/E and PEG ratios paired with XPO’s current earnings per share to Opportunities come up with a stock price. XPO operates heavily in both

An increase in e-commerce demand has provided new transportation and logistics, which made it harder to customer needs and opportunities to take advantage of compare to any true competitors. A majority of in the industry. The e-commerce industry is predicted to companies within this space heavily favor one or the continue to grow globally at a double-digit rate through other. Therefore, we did not feel that the relative 2020, and more companies are continuing to outsource valuation model accurately depicts our stock price. Our order fulfillment12. The overall economy is strong and the team believes that the DCF and EP model most accurately industrials sector as a whole is highly correlated to the reflect XPO’s current intrinsic value. Using the DCF and EP performance of the market. Increased consumer model we were able to account for economic, industry, spending and the new tax laws have the potential to competitive, and company specific factors to arrive at our increase profitability throughout the company. Lastly, BUY rating for XPO Logistics, Inc. with a target price range total cargo rose 11.8% in 2017, and an increased of $93 - $99. emphasis on infrastructure investment has driven the demand for raw material transportation15. XPO needs to Revenue Decomposition maintain the rate at which they’re expending resources to dip into technological advancement and capitalize on XPO’s revenue is broken up into two main segments, these opportunities. Transportation and Logistics. The transportation segment was further broken down into sub segments of Threats transportation, including: freight brokerage, less-than- truckload, last mile, full truckload, and global forwarding. The biggest potential threat to XPO is the chance of an Each area was then broken down between revenue from economic downturn; the uncertainty and effects of tariffs North America and Europe. Logistics revenue could not on global trade must be considered as well. China is be further decomposed, as XPO does not provide historically an innovator in the continued development of guidance for logistics revenue based on geographic technology and e-commerce, and increased tension there location. could potentially slow growth and add conflict6. Increases in fuel prices and wages also pose a threat to XPO’s Our team assigned growth rates to the individual sub transportation business. The transportation and logistics segments of transportation, equating to a total industry is a highly competitive and growing industry. transportation growth. Only one growth rate was New entrants face low barriers to enter this space, which assigned to the logistics segment of XPO’s revenue influx. sheds potential for price competition amongst peers. The total growth of logistics revenue became a plug. New technology also allows consumers to have ever- Total revenue is project to grow at 10% in 2018, aligned changing expectations & demands, giving new with management expectations and total revenue growth competitors the ability to disrupt the industry rates will decrease to 8.75% in 2019, and continue to immediately if taken advantage of. decrease by roughly 1% until they hit steady state growth in 2025 at 3.4%.

Valuation Analysis Transportation Revenue Growth

We have projected the total transportation segment to Methods of Valuation grow by roughly 8% next year based on management Our research analysts arrived at the current intrinsic guidance. We project growth to decrease the following 7 value for XPO using multiple valuation models: The years until it hits are continuing value growth rate of Discounted Cash Flow Model (DCF), the Economic Profit 3.25%. North American business makes up a majority of model (EP), the Dividend Discount Model (DDM), and the transportation revenue, comprising roughly 74% of Relative Valuation model. The DDM model proved to be revenue. LTL is currently XPO’s largest segment of North

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American transportation revenue, but we have attached from due to their competitive advantage within this the lowest growth rate, 7% in 2018, as the market is space. XPO has made it evident that they plan on already saturated with competition and they have the increasing their logistics business by taking advantage of second largest market share only behind FedEx Freight18 the dramatically increased e-commerce growth that has We then decreased the growth rate for LTL by 1% from been experienced globally. We decreased growth rates 2019-2023, and then leveled growth out at 3.25% in by 1% for the following 6 years from 2018 to 2024, where 2026. Last mile is currently the smallest portion of North we then decreased the growth rate to a steady state of American transportation revenue, but we have attached 3.25% in 2026. the largest growth rate in 2018, 16%, due to the immense Cost of Transportation and Services focus on last mile hubs making last mile delivery accessible to over 90% of the population20. The Last mile XPO’s cost of transportation and service account is their growth rate will then steadily decrease until it hits a largest expense on the income statement. It represents steady state at 3.25% in 2026. Freight Brokerage is the the cost of services for the transportation and logistics last segment of the North America transportation segment of the business. It includes providing freight revenue stream and is projected to grow at 9% in 2018 transportation and services to customers, truck driver based on guidance that we received from management. salaries, and commissions paid to independent We then decreased the growth rate by 1% for the next 5 contractors. This account represents 52.85% of revenue years, applied a steady declining growth rate of .25% in in 2017, which makes it extremely sensitive to our the following 3 years, until eventually reaching steady NOPLAT and intrinsic value calculation. Our research state growth of 3.25% in 2026. team agreed to decrease the account by 1% of revenue to 51.85% in 2018, and to continue decreasing it by 1% Europe makes up the remaining 26% of transportation for the following 2 years. It will reach a 49% steady state revenue. XPO is investing a lot of resources on expanding starting in 2022. The decision to decrease the account in Europe where they currently are the number one full- was made because of management’s goal to decrease truckload provider8. Full-truckload made up over 65% of margins by 1%, in which they are on track to meet for Europe transportation revenue in 2017. However, 2018. This decrease is due to a focus on providing mix because they have already captured most of the full- services (transportation and logistics services) to its truckload business and are the number one provider, we customers, as well as an increase focused on technology believe that they have already hit a steady state of that will increase efficiency and lower their wage growth. We used a 3.25% steady growth rate across our expenses. Looking ahead, automation within the supply model for full truckload revenue. This year XPO has chain with the addition of robots and other future expanded their transportation services to Europe adding initiatives will decrease overall costs associated with last mile services. According to management, they plan to transportation and services. do $40 million in sales in 2018, and are extremely confident that they will double sales in 2019. This Direct Operating Expense business segment has a lot of potential for growth, thus, after 2019 we attached a 45% growth rate and then Direct operating expense is the second largest expense continued to keep growth rates high until we steady on the income statement, representing 29.69% of revenue in 2017. This account mainly consists of them out at 6% in 2024. LTL is the last revenue segment in Europe. Growth in this segment in 2017 was 6.32%. Per personnel, facility and equipment, materials and supplies, management expectation, we attached a 5.25% growth and information technology expenses. We increased rate in 2018 and then continued to decrease it by 0.25% operating expenses by about 1% to 30.50% in 2018 and until we expect it to steady out at 3.25% in 2026. then kept it constant for the remainder of our valuation model. We increased it due to the 30 last mile hubs Logistics Revenue Growth added this year, which in turn will increase facility expenses. This increase is comparable to the increase of We project XPO’s logistics business segment to grow at 0.95% increase seen from 2016 to 2017 when 25 new last 14% next year, up from 7.5% growth in 2017 which is in mile hubs were added. line with management expectations. We strongly feel that there is an opportunity here that XPO will benefit

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Capital Expenditures (CapEx) business (5.00%). Using these assumptions, we calculated a cost of equity of 11.86%. We forecasted capital expenditures to be $470 million in 2018 based on current expenditures and projections for Dividend Yield: 4% the remainder of the year. We then increased CapEx by the growth in transportation revenue for each year. We Cost of preferred equity is the preferred stock dividend based our CapEx growth on transportation revenue yield, which is 4% and we are using the assumption that because this is our asset heavy revenue segment, which this will stay constant for the duration of our model. we believe best reflects the growth of projects that XPO Cost of Debt invests in. Management stated that as long as the economy is healthy, capital expenditure growth will be a Pre-Tax Cost of Debt: 5.01% main focus in order to continue to grow the company. Marginal Tax Rate: 22.93% XPO’s yearly fixed maintenance capital expense is $225 million, which leaves $255 million used to fuel other XPO’s debt rating was recently upgraded by Moody’s and projects in 2018. There is much anticipation and S&P to Ba2, and BB respectively. This upgrade lowered speculation of future M&A activity due to high free cash our pre-tax cost of debt, as the vote of confidence in flow levels. While we cannot predict M&A activity into XPO’s rating increase lowers the default risk assumption. our model, we believe that XPO has the capacity to We used the 2034 bond yield of 5.01%, which was the increase CapEx further, and would not be surprised if longest maturity bond, for our pre-tax cost of debt. such activity occurred in the near future. Taking the bond yield (5.01%) and multiplying it by one minus the marginal tax rate (1-22.93%) we arrived at Weighted Average Cost of Capital (WACC) 3.86% for our cost of debt. The WACC calculation for our companies is one of the Using our calculated cost of equity (11.86%) and most model sensitive components because it is used to multiplying it by the weight of equity (60.43%) then discount our free cash flows used in the calculation of our adding it our cost of preferred equity (4%) times the intrinsic value in the DCF and EP model. The capital weight (0.26%) and the cost of debt (3.86%) times the structure of XPO consists of: 60.43% equity, 39.31% debt, weight (39.31%), we arrived at our WACC of 8.328%. and .26% preferred equity. We assume the capital structure to stay stable in the future. CV Growth of NOPLAT

Cost of Equity and Preferred Equity Continuing Value (CV) growth of NOPLAT was projected at 3.25%. This projection was made based on our long Risk-Free Rate: 3.189% term GDP growth outlook of 3.25%. We also took into Market Risk Premium: 5.00% account steady revenue growth.

Raw Beta: 1.628 The Cost of Equity was calculated using the Capital Sensitivity Analysis 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 WACC against CV growth of NOPLAT 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 We compared CV growth rate of NOPLAT to WACC to see historic S&P 500 returns as well information provided how changes in capital structure and our continuing long- by Aswath Damodaran, a well trusted corporate term growth would affect our stock price. Changing finance professor at the New York Stern School of weighted average cost of capital reflects changes in the structure of a company. As XPO continues to grow it is

14 possible that the structure of the company will change, see how different cost structure will impact our stock especially with their focus on paying down debt. To price. display these changes, we increased and decreased WACC by 0.50%. Continuing value of NOPLAT displays are CV ROIC against the Risk-Free Rate 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 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 We tested the beta against the market risk premium in price. We changed the risk-free rate by 20 basis points order to see how the risk of the market affected the (.20%) to reflect these changes. The CV ROIC can vary based on different projects that XPO takes on. We chose value of our stock price compared to XPO’s volatility to see how different returns on invested capital would towards the market. Beta, which is used in our cost of impact our stock price by increasing and decreasing CV of equity calculation has shown to be a big driver in the ROIC by 1%. stock price calculation. By changing beta by just 0.1, our sensitivity analysis shows a major swing in the stock CV Direct Operating Expense against CV Logistics price. Market risk premium is constantly changing due to Revenue 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 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 We tested 2025 capital expenditures starting in year facility and maintenance expenses. If XPO were to 2024 with our continuing value of cost of transportation expand operations in their logistic segment in new & services to see how major operational changes in later markets, like Asia, their facility expense would increase. years will impact our stock price. Capital expenditures By comparing these two variables, we see how growing directly affect our PP&E account. We changed capital the logistics segment of the company would impact the expenditures by $50 million to show the potential effects intrinsic value of XPO’s stock price. 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

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References 11. Jacobs, B. S. (Director). (2018, August 2). Q2 2018 XPO LOGISTICS INC EARNINGS CONFERENCE CALL[Video file]. Retrieved September 17, 2018, from http://investors.xpologistics.com/phoenix.zhtml?c=2046 1. Analyzing the revenue effects for business and key 15&p=irol-EventDetails&EventId=5272528 industries under the Tax Cuts and Jobs Act. (2018). EY. 12. Marketer, E. (2018, January 17). Asia-Pacific Retail and Retrieved September 10, 2018, from Ecommerce Sales: EMarketer's Updated Estimates for https://www.ey.com/Publication/vwLUAssets/ey-tax- 2017–2021. Retrieved November 01, 2018, from reforms-effects-on-businesses-and-key- https://www.emarketer.com/Report/Asia-Pacific-Retail- industries/$File/ey-tax-reforms-effects-on-businesses- Ecommerce-Sales-eMarketers-Updated-Estimates- and-key-industries.pdf 20172021/2002183 2. Bali, V. (2018, January 31). China's e-commerce 13. Pro Drivers. (2016, May 19). New regulations set to hit explosion. What can we learn? Retrieved September 18, trucking industry: What you need to know. Retrieved 2018, from November 01, 2018, from https://www.weforum.org/agenda/2018/01/china- http://www.prodrivers.com/news/2016/5/40126016/Ne ecommerce-what-we-can-learn/ w-regulations-set-to-hit-trucking-industry-What-you- need-to-know 3. Buchman, E. (2018, August 02). The Rise of Amazon 14. Seabury, C. (2018, October 15). How Interest Rates Affect Logistics. Retrieved November 01, 2018, from the US Markets. Retrieved September 5, 2018, from https://www.ttnews.com/articles/rise-amazon-logistics https://www.investopedia.com/articles/stocks/09/how- 4. CBS/AP. (2018, August 28). Consumer confidence hits 18- interest-rates-affect-markets.asp year high. Retrieved September 6, 2018, from https://www.cbsnews.com/news/consumer-confidence- 15. The Cass Freight Index. (2018, August 4). Retrieved from hits-18-year-high/ https://www.cassinfo.com/transportation-expense- 5. Chappell, B., & Wamsley, L. (2018, October 02). Amazon management/supply-chain-analysis/cass-freight- Sets $15 Minimum Wage For U.S. Employees, Including index.aspx Temps. Retrieved November 01, 2018, from 16. Tipping, A., & Kauschke, P. (2016). Shifting Patterns. https://www.npr.org/2018/10/02/653597466/amazon- Retrieved September 17, 2018, from sets-15-minimum-wage-for-u-s-employees-including- https://www.pwc.com/sg/en/publications/assets/future- temps of-the-logistics-industry.pdf 6. Damicis, J. (2018, January 15). Recent and Emerging 17. United States Fed Funds Rate 1971-2018 | Data | Chart | Trends in Transportation and Logistics. Retrieved Calendar. (n.d.). Retrieved September 4, 2018, from November 01, 2018, from https://tradingeconomics.com/united-states/interest- https://www.camoinassociates.com/recent-and- rate emerging-trends-transportation-and-logistics 18. XPO Logistics Inc., FORM 10-K. (2017). UNITED STATES 7. Davidson, P. (2018, April 29). Truck driver shortage is SECURITIES AND EXCHANGE COMMISION raising prices, delaying deliveries. Retrieved September 19. XPO Logistics Inc., FORM 10-Q. (2018). UNITED STATES 19, 2018, from SECURITIES AND EXCHANGE COMMISSION https://www.usatoday.com/story/money/2018/04/26/tr 20. XPO Logistics Adds Augmented Reality to the Last Mile uck-driver-shortage-raises-prices/535870002/ Experience. (2018, June 27). Retrieved from 8. Department, S. M. (2018, February 20). XPO Logistics https://news.xpo.com/en-us/news/1188/xpo-logistics- SWOT Analysis Matrix (Strengths, Weakness, adds-augmented-reality-to-the-last-mile-experience Opportunities, Threats). Retrieved September 18, 2018, from http://fernfortuniversity.com/term- papers/swot/1433/353-xpo-logistics.php 9. Global retail e-commerce market size 2014-2021. (n.d.). Retrieved from https://www.statista.com/statistics/379046/worldwide- retail-e-commerce-sales/ 10. Holcomb, M. C. (2017, September 08). 26th Annual Study of Logistics and Transportation Trends: Transportation at Digital Speed. Retrieved September 19, 2018, from https://www.logisticsmgmt.com/article/26th_annual_stu dy_of_logistics_and_transportation_trends_transportati on_at

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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.

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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 expenses Cost 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 1234 5678 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 1234 5678 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 00000000 0 Future Stock Price $ 72.75 Discounted Periods 12345678 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. 5yr Ticker 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 61,21000000 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 0000000 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 61,21000000 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% WACC $ 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

Beta $ 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 Market Risk Premium CV Growth of NOPLAT 5.60%$ 97.27 $ 87.95 $ 79.70 $ 72.33 $ 65.71 $ 59.72

CV Cost of Transportaion and Services $ 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 CapEx (2025) 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

CV ROIC $ 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 Risk Free Rate 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

CV Direct Operating Expense $ 94.77 30.00% 30.50% 31.00% 31.50% 32.00% 32.50% e 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

CV Logistics Revenu 7.00%$ 108.54 $ 97.63 $ 86.71 $ 75.80 $ 64.89 $ 53.97