Over the last six months, RXO’s shares have sunk to $15.44, producing a disappointing 9.4% loss - a stark contrast to the S&P 500’s 5.6% gain. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy RXO, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think RXO Will Underperform?
Even though the stock has become cheaper, we don't have much confidence in RXO. Here are three reasons we avoid RXO and a stock we'd rather own.
1. Sales Volumes Stall, Demand Waning
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Ground Transportation company because there’s a ceiling to what customers will pay.
Over the last two years, RXO failed to grow its units sold. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests RXO might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.
2. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, RXO’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
RXO’s $670 million of debt exceeds the $17 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $109 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. RXO could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope RXO can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
RXO falls short of our quality standards. After the recent drawdown, the stock trades at 31.2× forward EV-to-EBITDA (or $15.44 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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