Over the past six months, GXO Logistics has been a great trade, beating the S&P 500 by 12.8%. Its stock price has climbed to $51.54, representing a healthy 17.3% increase. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in GXO Logistics, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is GXO Logistics Not Exciting?
We’re happy investors have made money, but we're cautious about GXO Logistics. Here are three reasons why 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% 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 Barely Growing
We track the change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
GXO Logistics’s full-year EPS grew at an unimpressive 5.2% compounded annual growth rate over the last three years, worse than the broader industrials sector.
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 $5.31 billion of debt exceeds the $288 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $824 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 topping the market in recent months, the stock trades at 19.7× forward P/E (or $51.54 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at one of our all-time favorite software stocks.
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