This Logistics Stock Is Grabbing Tons of Market Share. Time to Buy?

XPO (XPO -6.92%) has transformed itself over the last two years, spinning off both GXO Logistics, its former contract logistics segment, and RXO, its former truck brokerage.

The company made those moves primarily to unlock shareholder value because Chairman Brad Jacobs had long argued that the stock was undervalued due to a “conglomerate discount,” since the company had no true publicly traded peers on the market.

Now that it has fulfilled Jacobs’ vision and slimmed down to a pure-play less-than-truckload (LTL) carrier in North America and Europe, investors are hopeful that the stock’s valuation will improve compared to those of its peers.

In its fourth-quarter earnings report, its first following the RXO spinoff last November, XPO delivered solid results. Amid a challenging macroeconomic environment, XPO’s fourth-quarter 2022 revenue increased 3.3% to $1.83 billion, slightly below estimates at $1.84 billion.

But the company’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped 38% to $262 million, and adjusted earnings per share came in at $0.98, which compares with adjusted EPS of $0.64 in the quarter a year ago and the analyst consensus at $0.85.

The stock rose after hours on Wednesday but declined Thursday following the earnings call, when analysts seemed to balk at the company’s plan to go after market share by pursuing national customers.

The stock was down 14%, though it recouped some of those losses in after-hours trading. Despite the sell-off, the company appears to be on track to hit its long-term guidance and is gaining market share in a fragmented industry. Let’s take a closer look.

Image source: XPO Logistics.

On the move

At a time when most trucking and transportation companies are reporting declining volumes, XPO delivered another quarter of volume growth, continuing its streak of volume gains by adding 0.9% in tonnage in the quarter, with shipments up 1.5%. That compares to a high-single-digit decline in the overall LTL industry as macroeconomic headwinds have weighed on shipping demand.

XPO has added volume by expanding capacity with a plan to add 900 net new loading-terminal dock doors by 2027, as it laid out in its LTL 2.0 plan in 2021. The company also grew its trucking fleet to over 28,000 trailers and added 1,700 new drivers in 2022, bringing that total to 13,000.

The company owns trailer manufacturing plants and 130 XPO driver schools, giving it a competitive advantage since it can control its own supply, expanding both vehicle and labor capacity as needed. The driver schools are especially helpful at a time when labor shortages are affecting nearly every industry across the country.

Management did say that yield, or pricing in the LTL industry, came at the low end of its expected range due to a strategic change in the channel mix. Aroon Amarnani, the company’s vice president for strategy, explained in an interview with The Motley Fool that this was due to the addition of national customers, which tend to have a lower yield but help the company strategically by driving density in its network.

XPO said its adjusted operating ratio improved by 60 basis points in the quarter to 87.1%.

Time to buy?

Like the rest of the trucking industry, XPO is likely to face headwinds over the coming year because rising interest rates have clamped down on business investments, and economists still expect a mild recession.

However, the company is making progress on its LTL 2.0 plan, which calls for compound annual growth in adjusted EBITDA of 11% to 13%, annual revenue growth of 6% to 8%, and a 600-basis-point improvement in operating ratio.

With improvements in damage frequency and on-time rates, the company should be able to keep the market share it gained in recent quarters and looks poised to continue adding share as it expands capacity. That should put XPO in an advantageous position when the economy turns around.

With the double-digit drop in the stock price, the market seems skeptical that its strategy of pursuing national customers will pay off. But if XPO can deliver on its 2027 targets, the stock should be a long-term winner.

Jeremy Bowman has positions in GXO Logistics, RXO, and XPO. The Motley Fool recommends GXO Logistics, RXO, and XPO. The Motley Fool has a disclosure policy.