XPO piqued my interest because of its sheer undervaluation – trading at less than a half of ODFL’s EV despite having an almost similar EBITDA!
While this looked too appealing, a deep dive into the company changed my opinion to the contrary.
Allow me to present both the Bull and Bear cases in this deep-dive.
When Canada’s richest family realized that the high-profile adventurous merger of its largest owned entity, Thomson, with Reuters, was a fatal decision, it was too late to change tracks. This was perhaps the most flawed capital allocation decision in its history.
But this has reversed now.
In this post, I explain the market misconceptions and what makes TRI a stunning business. I delve further into how I identified the stock after having it on my watchlist for a number of years.
More than a year back in March 2019 we had taken an exposure in Union Pacific (UNP) triggered by the appointment of Jim Vena, protégé of Hunter Harrison, as the COO of the company. Even though the company joined the Precision Scheduled Railroading (PSR) bandwagon much earlier in September 2018, the announcement did not instill confidence to pull the trigger then. The initial investment started with a tumultuous journey as the freight volumes went from a mild recession in late 2019 to one of the worst (in 100+ years of history of freight) in March 2020. While jittery and shaken by the magnitude of destruction, a $ 2.1 m open market purchase by William Laney, former CEO of Sysco and director of UNP could not go unnoticed, as this was the largest purchase by an insider after 2015. After all, at the March-end price the Street was factoring a mere inflation-like growth of 3.5% (vs. 11% last 10 years) to an already depressed 2019 free cash flow implying no benefits of PSR.
CARR provides an asymmetric opportunity resulting from the valuation dislocation after its spinoff from UTX.
In April I wrote an exclusive thesis on VIC about the asymmetric opportunity presented by the valuation dislocation from the spinoff of CARR. Since then the stock has risen by ~70% vs. a range of between 5-20% for Trane, Johnson Control and Lennox. Now that the exclusivity period for VIC is over and I still maintain half the position I am writing a concise version of the thesis which could help anyone gain an understanding of investing in the HVAC industry.