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For decades globalization has dominated the conversation around the production of goods. As a rule, the largest corporations in the world outsource production to China, India, and many other countries with cheap labor.
But a bipartisan political backlash to the mass exporting of American jobs, and the impacts of the coronavirus pandemic on global supply chains means that the traditional narrative is changing quickly – and that’s going to have a big impact on how the United States economy functions moving forward.
Top economist Mohamed El-Erian says inflation can’t get to the 2% goal because of supply-chain issues and a “change in globalization.”
“You cannot rewire supply chains overnight,” he told CNBC. Public outcry in China sparked by the government’s strict “zero-COVID lockdowns,” has highlighted the need to fix supply chains.
We are only seeing now – after more than two years of global disruption brought on by COVID-19 – major changes in production.
That’s where “reshoring” comes in – the buildout of domestic manufacturing capacity and the creation of manufacturing and adjacent jobs. U.S. companies are acknowledging that reshoring, once the subject of talk but no action, is accelerating. According to a recent Deloitte report, more than 60% of manufacturers surveyed have started reshoring or near-shoring their production capacities.
The current semiconductor shortage has also highlighted the issue; the consumer electronics and automotive industries face tough supply constraints over a lack of products.
Because of the August 2022 passage of the CHIPS and Science Act, companies like Intel Corp. (NASDAQ: INTC) are building fabrication facilities (“fabs”) in the U.S. to manufacture semiconductors. Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE: TSM), one of the most advanced semiconductor manufacturers in the world, is also building right here in the United States.
Volkswagen AG (OTC ADR: VWAPY), one of the world’s largest automotive makers and most recognizable brands, is planning to reintroduce its “Scout” nameplate as an electric vehicle (EV). Volkswagen plans for the Scout to be designed, engineered, and manufactured in the U.S. for American customers.
But, I’m not recommending a carmaker – or a chipmaker for that matter. The way I see it, as manufacturing increases, the need to transport these goods becomes even more pressing.
That is why I’m looking directly at trucking – long haul trucking (LHT), specifically.
Over the next decade, LHT could be one of the most important industries in a country with a re-energized and growing manufacturing sector.
That’s why we think XPO Logistics Inc. (NYSE: XPO) could be a strong long-term buy. XPO is down roughly 30% from its all-time high as a result of macroeconomic headwinds. Long term, the industry is set to grow and valuation has become attractive.
XPO is a pure play less-than-truckload (LTL) transportation company, which means they ship goods that are not as large as full truckload loads, but too large for parcel shippers. Most goods are on pallets with shipments weighing between 150 and 15,000 pounds.
While there are a lot of reasons why LTL services are needed, one of them is to keep supply chains flexible.
Often, a company won’t wait until a wholesaler is running low on product inventory to ship a full truckload to replenish goods and instead ship for frequency to mitigate the risks of loss of sales.
XPO reported a 3% increase in revenue for Q3 when the impact of selling the intermodal business is backed out. Adjusted net income from continuing operations increased to $168 million vs $109 million a year ago.
CEO Brad Jacobs said the record results demonstrate how strong its business is. LTL generated record revenue and year-over-year tonnage accelerating every month and was noted to inflect positively in September with more improvement in October, outperforming typical seasonality.
Looking at the full year, XPO reaffirmed guidance for its North American business to generate at least $1 billion of full-year adjusted EBITDA.
Over the last several quarters XPO has also grown its cash position to $544 million, over double what it was a year ago, and cut its debt 3 straight quarters.
XPO currently trades at a discounted P/E ratio to the S&P 500 at 7 and according to its latest guidance it is trading at 6.1x 2022E EBITDA.
This valuation is attractive given its current positioning in the market and sitting at the low end of its longer-term valuation range.
Given its current guidance, XPO could be a strong long-term buy if the market turns in 2023.
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