What a fantastic six months it’s been for XPO. Shares of the company have skyrocketed 53.3%, setting a new 52-week high of $228.56. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in XPO, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is XPO Not Exciting?
Despite the momentum, we’re cautious about XPO. Here are three reasons why XPO doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, XPO’s 5.6% annualized revenue growth over the last five years was tepid. This was below our standard for the industrials sector.
2. Low Gross Margin Reveals Weak Structural Profitability
Cost of sales for an industrials business is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics.
XPO has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 19.8% gross margin over the last five years. Said differently, XPO had to pay a chunky $80.22 to its suppliers for every $100 in revenue.
3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
XPO has shown poor cash profitability relative to peers over the last five years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 1.6%, below what we’d expect for an industrials business.
Final Judgment
XPO’s business quality ultimately falls short of our standards. Following the recent rally, the stock trades at 42.6× forward P/E (or $228.56 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward the most entrenched endpoint security platform on the market.
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