Up 132% This Year, Is It Too Late to Buy This Hot Growth Stock?

2023 has been a challenging year in the freight industry. Macroeconomic headwinds have been persistent due to high interest rates and an unwinding of excess inventory in industries like retail. Meanwhile, competitive pressure has led to the bankruptcy of less-than-truckload (LTL) carrier Yellow, put freight brokerage start-up Convoy out of business, and delivered a significant setback to Flexport, which was supposed to be an industry disruptor.

However, despite that challenging environment, XPO (XPO -2.15%) has emerged as a big winner this year, grabbing market share and breezing past analyst estimates. As a result, shares have more than doubled this year, up 132% year to date. The LTL carrier, which was the result of the spinoffs of GXO Logistics and RXO, showed off another round of strong results in its third-quarter earnings report on Monday.

Image source: XPO.

XPO keeps on trucking

XPO’s revenue rose 2% to $1.98 billion, edging out the consensus at $1.93 billion. Excluding the impact of a lower fuel surcharge, revenue rose 7.9% to $1.01 billion. That growth was driven by a 3.1% increase in tonnage per day, while pricing or yield increased by 6.4%. 

In addition, the company made progress on key strategic initiatives around customer service. For example, it posted its best-ever damage claims ratio at 0.4%, which was a significant improvement from 1.2% two years ago when it launched its LTL 2.0 plan to revamp the business. It also improved its on-time percentage by 8 percentage points, and Chief Strategy Officer Ali Faghri said in my interview with him that the company’s customer satisfaction in September was up more than 40% over the last two years. Those improvements help increase profitability and support customer retention and expansion. They also give the company cover to raise prices. 

In the third quarter, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose from $262 million to $278 million, or a 50-basis-point improvement in margin to 14%. Adjusted earnings per share, meanwhile, fell from $0.95 to $0.88, but that was still much better than the analyst consensus at $0.63.

Finally, the company made progress on its goal of reducing its operating ratio by 600 basis points by 2027 as the key metric improved by 140 basis points sequentially to 86.2%.

The growth strategy 

XPO continues to invest in increased capacity through new terminals and new trailers, of which it’s on track to manufacture more than 6,000 at its in-house facility in Arkansas.

The bankruptcy earlier this year of Yellow, one of the biggest LTL carriers in the country, has also given XPO an opportunity to scoop up market share as it had been investing in increased capacity since 2021 to take advantage of that opportunity. 

XPO is also growing its sales team, increasing it by 10% to 15% so far this year with a goal of 30% improvement by the end of next year. 

Is XPO a buy?

When XPO spun off GXO and RXO to slim down into a pure-play LTL carrier, it did so largely because management argued that the stock was undervalued due to a “conglomerate discount.”  

The stock’s surge this year seems to have justified that strategy, and those gains have led to an increase in the stock’s valuation. 

However, there’s still room for XPO to move higher as the company said there were signs that the macro environment could start to improve in 2024. CEO Mario Harik said on the earnings call, “Heading into 2024, we are hearing more optimism from customers about demand picking up.”

He added that it wasn’t a big number of customers, but the timing of the recovery doesn’t really matter for long-term investors. The freight market will recover, and with its capacity expansion, execution in customer service, and increased profitability, XPO looks well positioned to capitalize when it happens. There’s a lot of operating leverage in LTL, so profits could still move significantly higher as demand picks up. It’s still not too late to buy XPO.

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.

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