GXO Logistics (NYSE: GXO) is the world's largest pure-play contract-logistics company.
The company was spun off from XPO in 2021 under the logic that as separate companies, each one could make acquisitions in its own interest and allocate capital in the way that best suited it.
GXO has executed on that vision, making three acquisitions in three years and growing organically as well. However, a sluggish economy has presented challenges for the company. Inventory gluts following the pandemic meant that many of its customers were focused on paring down inventory over the last year, and the industrial economy has been slow as well.
As a result, GXO shares have traded mostly sideways in the last few years, and the stock was hovering just above a 52-week low following its recent second-quarter earnings report. It's now down 54% from its post-spinoff peak in the heady stock market of 2021.
Should investors take advantage of the recent sell-off? Let's take a closer look at where GXO stands after the latest report.
Image source: GXO.
GXO keeps grinding
Shares of GXO fell 5% after the earnings report came out on Tuesday. Results were mostly in line with estimates, but organic revenue growth of 2% was at the bottom end of the company's full-year guidance, and earnings took a hit due to headwinds in the macro-level economy.
Reported revenue jumped 19% to $2.8 billion in the quarter due primarily to its acquisition of Wincanton earlier in Q2, which bolstered the company's presence in the U.K., including in key verticals like aerospace and defense, and added more than 200 facilities to GXO's base.
Costs associated with integrating Wincanton weighed on margins as adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) slipped from $190 million to $187 million, and adjusted earnings per share fell from $0.70 to $0.55.
In a sign that momentum was picking up, GXO said that its sales pipeline, or backlog, increased to a 12-month high of $2.3 billion. It signed $270 million worth of new business wins in annualized revenue in the quarter.
GXO's edge
The logistics industry has evolved from traditional picking and packing to become highly automated, and GXO has invested heavily in technology, seeing it as an important advantage.
In an interview with the Motley Fool, GXO Chief Strategy Officer Kristine Kubacki stressed the importance of technology, saying,
We don't have a commercial discussion with a customer that doesn't include some sort of automation, and I think we've been doing it the longest. I think we do it the best, and I think that's the real differentiator with our customers.
GXO recently introduced a humanoid robot for its warehouse as part of a pilot program. Working with Apptronik, the company has deployed a general industrial humanoid robot that is 5'8" tall, can carry 55 pounds, and runs on swappable batteries. It can handle tasks like picking and packing items.
Artificial intelligence is also becoming a source of differentiation for GXO, as it's using new AI technology to optimize picking, manage inventory flow, and predict inventory replenishment.
Is GXO a buy?
GXO management told investors on the earnings call that inventory trends were starting to improve after the cycle bottomed in last year's Q4, and it expected to see more of a normal holiday season this year. The company should also benefit from easier comparisons heading into the second half of the year.
Meanwhile, GXO remains focused on its 2027 targets, which call for 8% to 12% organic revenue compound annual growth rate (CAGR) from 2021 to 2027, reaching $17 billion in revenue, 17% adjusted EBITDA CAGR to $1.6 billion, and cumulative free cash flow generated during that time of $2 billion.
GXO currently has an enterprise value of $10.6 billion, meaning it trades at roughly six times 2027 EBITDA.
It will take time for the momentum in the business to reaccelerate, but falling interest rates should give the economy a boost, and GXO's technological advantage and global reach should help it continue to attract new customers and grow existing relationships.
For patient investors, the stock looks like a good buy at current levels as the valuation looks attractive, and its organic growth rate will eventually accelerate.
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Jeremy Bowman has positions in GXO Logistics and XPO. The Motley Fool recommends GXO Logistics and XPO. The Motley Fool has a disclosure policy.
