Down 61%, Is This Industry Disruptor's Stock a Buy Right Now?

GXO Logistics (NYSE: GXO) hit the public markets with much fanfare. The world's largest pure-play contract logistics company was spun off from XPO in August 2021, when the pandemic stock market was booming. Investors had high hopes that GXO would be able to disrupt the logistics industry with bold initiatives.

The stock initially surged in 2021, but then fell sharply in 2022 and has stayed down since. Shares popped briefly last fall on news it was seeing takeover interest, but it gave up those gains once management said it was no longer in play.

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Amid worries over the trade war and signs of a weakening economy, the stock hit an all-time low recently, though GXO had some good news to share with investors when it reported first-quarter earnings last Wednesday.

In a difficult macro environment, the company posted better-than-expected results. Organic revenue increased 3%, and overall revenue rose 21% to $2.98 billion, which edged out estimates at $2.93 billion. The reported revenue figure includes its acquisition of Wincanton, a British logistics company whose results are included in GXO's quarter, though it has not yet been allowed to integrate Wincanton because it's still awaiting final approval from U.K. regulators.

Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) improved from $154 million to $163 million, while adjusted earnings per share (EPS) fell from $0.45 to $0.29, though that was still ahead of the consensus at $0.25.

In spite of the uncertain macro environment, GXO signed $228 million in new business and scored its largest contract ever, a landmark 10-year deal with England's National Health Service (NHS), that was enabled by GXO's earlier acquisition of Clipper Logistics, helping to validate its mergers and acquisitions strategy.

GXO stock gained 4.3% on the news on Thursday, May 8, due to the solid results and its pushback on the trade war narrative. Let's look at its prospects in the current economy and whether the stock is a buy.

Image source: GXO Logistics.

GXO's plan to beat tariffs

As a contract logistics provider with roughly 1,000 warehouses around the world, GXO looks like the kind of company that would be at risk from a global trade war or a recession.

However, thus far the company is seeing little sign of headwinds. CFO Baris Oran said during an interview with The Motley Fool that customer inventory remains healthy and elevated in some regions and categories.

GXO's customers are also making changes as needed, Oran said, readjusting supply chains to respond to new trade rules and repackaging products.

And the company has baked in economic resilience to its business model since half of its contracts are open-book, or cost-plus, meaning GXO can pass along added costs to its customers. The other half of the business has minimum-volume requirements and pass-throughs for inflation.

Oran called GXO an "all-weather business" because of the nature of its contracts, saying that the company could still hit its full-year guidance even if shipping volume fell between the low single digits or mid single digits.

For the full year, the company is calling for organic revenue growth of 3% to 6%, adjusted EBITDA of $840 million to $860 million, and adjusted EPS of $2.40 to $2.60.

Is GXO Logistics a buy?

At the current share price, GXO looks more resilient than the market is giving it credit for. Based on its EPS guidance for the year, the stock trades at a price-to-earnings ratio of less than 16 at the midpoint of that range.

Though the company does have customers that would be affected by a trade war or recession, it doesn't have any exposure to China. And its business is diversified into less-cyclical industries like aerospace/defense and -- with the recent deal with the NHS -- healthcare. Also, only about a quarter of its revenue comes from the U.S.

While it may take a few quarters for GXO to convince the market of its growth potential again given the economic uncertainty, at the current price the stock looks attractive and its long-term growth potential is still considerable.

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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.