GXO Logistics’s 33.2% return over the past six months has outpaced the S&P 500 by 24.6%, and its stock price has climbed to $55 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy GXO Logistics, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is GXO Logistics Not Exciting?
We’re happy investors have made money, but we don't have much confidence in GXO Logistics. Here are three reasons there are better opportunities than GXO and a stock we'd rather own.
1. Slow Organic Growth Suggests Waning Demand In Core Business
In addition to reported revenue, organic revenue is a useful data point for analyzing Air Freight and Logistics companies. This metric gives visibility into GXO Logistics’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, GXO Logistics’s organic revenue averaged 2.3% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations.
2. EPS Took a Dip Over the Last Two Years
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Sadly for GXO Logistics, its EPS declined by 2.2% annually over the last two years while its revenue grew by 15.7%. This tells us the company became less profitable on a per-share basis as it expanded.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
GXO Logistics’s $5.56 billion of debt exceeds the $205 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $849 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. GXO Logistics could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope GXO Logistics can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
GXO Logistics isn’t a terrible business, but it doesn’t pass our bar. With its shares outperforming the market lately, the stock trades at 19.6× forward P/E (or $55 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now. We’d suggest looking at one of our top digital advertising picks.
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