XPO Is Bucking the Industry Headwinds. Can the Trucking Stock Keep Beating the Market?

It's no secret that transportation stocks are among the most sensitive to the macro economy. After all, when consumers and businesses sense a recession coming, they tend to pull back on spending, which means lower demand for the products that move via ships, trucks, and trains.

Therefore, the transportation sector, which also moves raw materials for manufacturers, is seen as a leading indicator for the economy. So it's likely to be among the first to see the effect of headwinds in the economy.

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Coming into XPO's (NYSE: XPO) first-quarter earnings report, investors had only modest expectations for its results due to pressure from tariffs and weakening economic sentiment. Its peers in the less-than-truckload (LTL) industry had already reported underwhelming results. Sector stocks tumbled last Friday after rival Saia reported a sharp drop in profits, showing the effect of a weakening macro environment.

However, XPO surprised investors this past Wednesday, reporting better-than-expected results as it continued to improve customer service, allowing it to raise prices and expand margins. The stock rose 9% on the news.

Image source: XPO.

XPO outperforms the industry

XPO's revenue in the quarter fell 3.2% to $1.95 billion. Tonnage per day was down 7.5% and shipments per day fell 5.8%. However, the company continued to achieve an increase in yield, or price, thanks to better on-time rates and fewer damaged goods. Its damage claims ratio was just 0.3%, down sharply from 1.1% in 2020.

Pricing in the quarter was up 6.9%, leading to an improvement in operating ratio, and the inverse in adjusted operating margin, which fell by 30 basis points sequentially to 85.9%. It was also down 370 basis points over the last two years, even with a soft freight environment. Chief Strategy Officer Ali Faghri was particularly pleased with the company's performance relative to its industry peers.

XPO improved its on-time performance for the 12th straight quarter. In an interview with The Motley Fool, Faghri credited the company's in-house technology for efficiently managing its labor pool, saying: "In an environment where volumes are quite volatile, having the technology that allows our supervisors to know exactly how much labor we need any specific day, week, or month is a significant competitive advantage."

The company also significantly reduced its outsourced transportation cost by 53% in the quarter, helping to boost margins. In the first quarter, the percentage of linehaul miles outsourced to third-party carriers fell to 8.8%, down from 14.7% in 2024 and 23.8% in 2022.

The company is aiming to bring that number down to mid-single digits, which should provide a further tailwind in cost efficiency and service in the coming quarters.

What's next for XPO

The LTL provider certainly has exposure to the macro environment, but so far this year performance has been stable. In fact, year-over-year tonnage growth has improved each month for the year, going from down 8.5% in January to down 5.7% in April, with the rest of the quarter expected to remain around that level. Additionally, the company will benefit from easier comparisons in the second half of the year.

Overall, the company has faced a challenging freight environment for the last three years. But it's still on track to deliver at least 600 basis points of improvement in operating ratio from 2021 to 2027, and it looks well-positioned to outperform its peers based on recent results.

XPO stock has tripled over the last three years, and the company has a long track record of beating the market. As the stock's pop on Wednesday shows, XPO should be able to keep climbing, especially if it can continue to outperform its peers. While the macro environment is likely to be challenging, the stock could surge once the industrial economy returns to growth.

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