GXO Logistics trades at $47 per share and has stayed right on track with the overall market, gaining 13.6% over the last six months. At the same time, the S&P 500 has returned 11.3%.

Is there a buying opportunity in GXO Logistics, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.

Why Is GXO Logistics Not Exciting?

We're swiping left on GXO Logistics for now. 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

Investors interested in Air Freight and Logistics companies should track organic revenue in addition to reported revenue. 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 2.5% 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 1.1% 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

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

GXO Logistics’s $5.50 billion of debt exceeds the $339 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $877 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 isn’t one of our picks. That said, the stock currently trades at 16.2× forward P/E (or $47 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.

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