RXO’s Billion-Dollar Move

United Parcel Service and third-party logistics provider RXO struck a deal on Sunday. It matters more for RXO — and its stock.

UPS said it is selling the third-party logistics provider Coyote Logistics to RXO for $1 billion.

Coyote is a freight broker. It doesn’t own trucks, but aggregates demand from customers who need shipping and supply from truckers who can move material, matching supply and demand for clients. That’s a similar business to RXO’s. UPS, of course, owns a lot of trucking assets.

"The deal is expected to make RXO the third-largest freight brokerage in North America, moving up five spots," said analyst.

Seidl adds that RXO got a good deal “buying at the bottom of the market.” UPS bought the Coyote business in 2015 for $1.8 billion.

He rates RXO stock Hold and increased his target for the stock price to $23 from $20 following the deal. Seidl doesn’t cover UPS stock.

UPS said it was happy with the price it is getting.

A look at Coyote’s financial performance sheds some light on the number. Coyote generated sales of roughly $3.2 billion in 2023, meaning RXO is paying about 31% of the prior year’s revenue. UPS paid $1.8 billion in 2015, while Coyote generated about $2.1 billion in 2014 revenue. The multiple was closer to 85% of the prior year’s sales.

Coyote appears to have increased its sales by about 5% annually while UPS owned the company.

As for earnings, RXO is paying a little less than 12 times Coyote’s 2023 earnings before interest, taxes, depreciation, and amortization, or Ebitda. RXO trades for about 14.5 times estimated 2025 Ebitda.

Investors favor companies buying businesses below current valuations. UPS’s sale of Coyote, which generated less than 1% of UPS’s 2023 Ebitda ($86 million), won’t significantly impact UPS. Coyote will be a larger part of RXO’s business. By 2025, UPS and RXO are expected to generate about $15 billion and $192 million in Ebitda, respectively.

Shortly after opening, RXO stock rose 12% to $22.62, while UPS shares increased 0.5% to $137.33. The Dow Jones was up 0.2%. So far this year, both RXO and UPS stocks have dropped about 13% due to slowing demand and weak pricing. Average rates per mile fell around 6% YoY and 24% from two years ago. The S&P 500 rose about 18% this year.