After Doubling in the Past Year, This Stock Is About To Hit Cruise Control. Time To Buy?

XPO (NYSE: XPO), the less-than-truckload (LTL) trucking company, hasn't gotten a lot of attention from investors, but the stock has quietly doubled over the last year, outperforming industry peers like Old Dominion Freight Line and Saia.

XPO data by YCharts

As an industry, these LTL stocks have a history of outperforming the market as the sector has outgrown other types of transportation and benefited from industry dynamics that allow for strong pricing power and high operating leverage. Additionally, the bankruptcy of Yellow in 2023 allowed these operators to gain market share and the ability to grow by acquiring Yellow's assets. It also raised prices by eliminating excess capacity. Over the last year, investors have turned bullish on the sector as the industrial economy seems to be returning to growth, as the Institute for Supply Management (ISM) manufacturing survey shows, which has indicated an expansion every month this year after a long streak of contractions. Operators like XPO tend to see the survey as an indicator of industrial demand.

However, XPO stock has jumped not just because of industrywide tailwinds, but because of its own business improvements and execution, including lowering its damage claims ratio, increasing productivity, and driving wider operating margins.

Those trends were on display in its first-quarter earnings report.

Image source: XPO.

XPO delivers again

XPO beat estimates on the top and bottom lines as it returned to growth in tonnage and shipments. Revenue in the quarter rose 7.3% to $2.1 billion, ahead of the consensus at $2.04 billion. The core North America segment reported 5% growth to $1.23 billion as yield, or pricing, rose 4%, while shipments were up 3% on a 0.1% increase in tonnage.

XPO's operating ratio, the inverse of operating margin, improved by 200 basis points to 83.9%, driven by a reduction in its damage claims ratio to 0.2%, or a record low. Meanwhile, it's invested in AI to deliver improvements in areas like route optimization and training, improving operations, and cutting costs.

On the bottom line, adjusted earnings per share jumped from $0.73 to $1.01, ahead of the consensus at $0.88. As a trucking company, XPO doesn't give guidance, but the tailwinds supporting the business operationally and on a macro-level seem like reasons to be optimistic.

What's next for XPO

XPO's stock has soared in the past because forward expectations have significantly improved for the stock due to both the company's execution and improving macroeconomics.

In an interview with The Motley Fool, Chief Strategy Officer Ali Faghri explained that the company was expecting to allocate more capital to share buybacks and paying down debt.

The company is targeting spending 8%-12% of its revenue on capex through 2027, and aiming for free cash flow to double from last year, when it was $329 million.

Faghri added, "We're going to have a lot of excess cash above and beyond the investments in the business," allowing us to spend on buybacks and debt pay-down. The company finished the quarter with $3.2 billion, in part from a history of acquisitions, and $237 million in cash.

Faghri also said that the company expects to generate billions of dollars over the next few years and would leverage its previous investment, as its capex is actually expected to go down. That, combined with the improving tailwinds in the industrial economy, could lead to surging profits over the next few years.

XPO is on track to hit the 2027 goals it set out in 2021, including a compound annual growth rate (CAGR) of 6%-8% in revenue and a 600 basis point improvement in adjusted operating ratio. Going forward, Faghri expects adjusted operating ratio to fall below 80%, signaling continued margin improvement at XPO.

While high expectations may now be baked into the stock, XPO could be an inflection point with profits. The stock still looks like a buy.

Jeremy Bowman has positions in XPO. The Motley Fool has positions in and recommends Old Dominion Freight Line. The Motley Fool recommends XPO. The Motley Fool has a disclosure policy.