Trucking stocks don't get a lot of attention these days, but savvy investors know that there's opportunity in every sector.
XPO(NYSE: XPO) represents a great example of that principle. During a time when much of the freight transportation sector has been mired in a recession, XPO has delivered phenomenal growth for investors thanks to investments and improvements in the business. In fact, the stock has doubled in the last year, and the company has consistently topped expectations. That performance was on display again in the third quarter, as the stock jumped 11.4% on Wednesday.
Revenue in the quarter rose 3.7% to $2.05 billion, which topped estimates at $2.02 billion. But what really stood out about the quarter was what the company was able to do in spite of declining volume. Tonnage per day was down 3.9%, though that was in line with a broader slowdown in the industry.
While volume was down, XPO drove an increase in yield, or price, of 6.7% excluding fuel in its core North American LTL business.
That improvement in price performance paid off on the bottom line. Its adjusted operating ratio, which is the inverse of operating margin, improved by 200 basis points to 84.2% in LTL as the company works toward its goal of an 81% operating ratio by 2027.
XPO also made progress in other strategic priorities. It reduced its damage claims ratio to 0.2%, which is down from 1.2% in 2021, thanks to service initiatives including employee training and better packing materials to protect freight.
Additionally, XPO is expanding capacity and bringing new terminals online. It's now opened 21 of the 28 service centers it acquired from Yellow when that company went bankrupt. On the bottom line, adjusted earnings per share rose from $0.88 to $1.02, which topped the consensus at $0.91.
Image source: XPO.
Why XPO's momentum should continue into 2025
What's most impressive about the company's performance this year is that it's come in a generally weak freight environment.
The closely watched ISM manufacturing survey has reported a contraction in activity in the last six months and in 22 of the last 23 months, which is a clear headwind for the freight industry.
However, there is good reason to bet on an industry recovery in 2025. In an interview with The Motley Fool, XPO Chief Strategy Officer Ali Faghri noted that freight recessions typically last 12 to 18 months, and this one has now lasted nearly two years.
Additionally, he said that interest rate cuts from the Federal Reserve and putting the uncertainty around the election behind us should help drive a rebound in the industry. Lowering borrowing costs will increase capital investments across the economy, and some businesses are holding back on decisions until the election is resolved.
If volume grows in 2025, XPO's profits could really take off next year, thanks to its capacity expansion and improvement in on-time percentage and damage claims that led to higher yield. Faghri also said that the company would have excess capacity of 30% after it finished opening the service centers it acquired from Yellow, "which is typically where you want to be as an LTL carrier at the trough of the cycle."
XPO is now the No. 3 LTL carrier in North America. Old Dominion Freight Line, the largest pure-play in the industry, just reported an operating ratio of 72.7%, showing that there's a lot of room for XPO's profitability to improve as it executes on its strategic initiatives.
Based on its service improvements, expanding margins, and an expected macro recovery, XPO looks like a smart buy.
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Jeremy Bowman has positions in XPO. The Motley Fool has positions in and recommends Old Dominion Freight Line. The Motley Fool recommends XPO and recommends the following options: long January 2026 $195 calls on Old Dominion Freight Line and short January 2026 $200 calls on Old Dominion Freight Line. The Motley Fool has a disclosure policy.
