After Another Strong Quarter, XPO Sees More Room for Margin Improvements

XPO (NYSE:XPO), the less-than-truckload (LTL) carrier, delivered another strong earnings report Thursday morning, with double-digit revenue growth in North America, excluding fuel, and impressive margin improvement.

Overall, the quarter showed the company continuing to execute effectively with service improvements leading to higher prices and wider margins.

Total revenue rose $12.4% to $2.37 billion, which was slightly below estimates at $2.38 billion. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 26.6% to $433 million, and adjusted earnings per share jumped 59% to $1.70, ahead of the consensus of $1.57.

Adjusted operating ratio, a key industry metric and the inverse of adjusted operating margin, improved by 260 basis points in the quarter to 80.1%, driving the bottom-line improvement.

Image source: XPO.

What's behind XPO's growth

XPO posted its strongest tonnage growth in years, up 5% per day, which Chief Strategy Officer Ali Faghri attributed to both market share gains and demand tailwinds as the industrial economy rebounds.

Faghri estimated that about two-thirds of the tonnage growth would come from market share gains, with the remainder from overall demand growth. The ISM's manufacturing purchasing managers' index (PMI) offers a good proxy for industrial demand, and that index has indicated an expansion since the start of 2026 after several years of decline.

XPO's pricing increased in the mid-single digits, driven by strong results in areas such as damage claims and on-time performance. Additionally, it's seeing strong growth with small and medium-sized businesses where new programs like grocery consolidation are helping it gain market share.

XPO's top-line growth contributed to its margin expansion, but cost efficiencies also helped. The company is leveraging AI in areas like labor and route optimization, and making pickups and deliveries more efficient. It also grew shipments in the quarter by 6% even though headcount was only up 1%, showing it's more efficiently using its personnel.

What's next for XPO

In 2021, XPO outlined a set of goals for 2021-2027, including 11%-13% adjusted EBITDA compound annual growth rate (CAGR) in North America, revenue CAGR of 6%-8%, and adjusted operating ratio improvement of at least 600 basis points.

Faghri said the company was on track to achieve those goals a year early, and that's in an environment in which there's been a freight recession for four years.

XPO's adjusted operating ratio has fallen to 80%, but looking ahead, Faghri believes the company can get it down to the low 70's, especially if demand continues to grow. The company is gaining market share thanks to service improvements and a focus on small- and medium-sized businesses, and it has excess capacity to take advantage of a rebound in demand.

The future continues to look bright for XPO.

Jeremy Bowman has positions in XPO. The Motley Fool recommends XPO. The Motley Fool has a disclosure policy.