halbergman
GXO Logistics, Inc. (NYSE:GXO) is coming off record-breaking revenue results for the company. Demand for its technology continues to rise from customers looking to cut costs and boost productivity, even though it has taken a big hit with its share price under the current economic conditions because of being considered a high-risk tech stock.
With the holiday season upon us, the company will close out the year on a high note, while continuing to secure contract wins that are already creating a solid backlog heading into 2023.
Recent demand has been particularly strong in consumer-packaged goods, industrials and technology, as the company enjoys growth both organically and inorganically.
In this article we’ll look at its latest earnings report, increasing demand, and what 2023 is shaping up to look like.
Some of the numbers
The company delivered record revenue of $2.29 billion in the third quarter, up 16.2 percent year-over-year, beating estimates by $40 million. Organic growth in the quarter was 16 percent.
Adjusted diluted earnings per share were $0.75, up from $0.56 for the third quarter 2021, beating by $0.05.
Adjusted net income in the reporting period was $89 million, a nice increase from the $65 million in adjusted net income in the same quarter last year.
Cash flow from operations jumped from $105 million last year in the third quarter to $116 million in the third quarter of 2022. Free cash flow was $47 million in the quarter, down from the $50 million in free cash flow in Q3 of 2021.
In the reporting period, new contracts are projected to add $158 million in annual revenue, and for the first nine months of the year, new contracts are projected to add $497 million in revenue in 2023.
Full year 2022 guidance: Organic revenue growth of 12 percent to 16 percent. Adjusted diluted earnings per share of $2.70-$2.90 adjusted EBITDA of $715 million to $750 million. Return on invested capital of greater than 30%. Free cash flow of about 30 percent of adjusted EBITDA
Even though the company has been performing strongly, the market has been punishing GXO Logistics, I believe, because of the negative sentiment toward high-tech stocks like GXO in the current economic environment.
Impact of inflation, interest rates, and the Fed
With the global economy under inflationary pressure, resulting in central banks boosting interest rates, it has resulted in tech stocks like GXO going out of favor. Investors see contracting margins and expected decline in earnings as headwinds for high-growth tech stocks.
GXO’s share price, consequently, has taken a beating over the last year, falling from a 52-week high of $105.92 to a 52-week low of $32.10. It has bounced slightly off that low, but I think after the numbers were released, the share price is likely to enjoy a bounce as we approach the end of the year. That’s also likely because of the increase in demand during the holiday season.
The revenue retention rate has recently been in the mid-to-high 90s, and if it can continue that rate going forward, it bodes well for the company, as increasing concerns over the depth and length of the recession weighs on the minds of investors.
Inflation numbers are going to be important over the next two to three months, as that will provide more clarity on how the Federal Reserve will respond to it with interest rate hikes. Also important is if the Fed shows signs of turning more dovish if inflation starts to reverse direction and starts declining. Under that scenario, the share price of GXO would take off under a Fed pivot.
When considering the solid performance of GXO, this is without a doubt the major contributing factor to the decline in its share price and the market not rewarding it for its positive growth trajectory.
Outlook
While economic worries are having a disproportion impact on the share price of GXO, most of the market misses the fact it actually plays to the strengths of the company’s business model, which is to help the company lower costs and increase production; those are things companies will look to do if the economy gets worse before getting better.
For that reason, I think demand for logistics expertise will accelerate in the months and years ahead, and based upon its performance, GXO should get a significant slice of market share as the sector grows.
As mentioned above, the company has already won close to $500 million in incremental revenue for 2023, and it has a sales pipeline of approximately $2 billion. Assuming retention rates remain high, it looks like GXO is going to do very well in 2023, however, the macroeconomic situation plays out.
Conclusion
Considering high demand, contract wins and revenue retention rates, I think GXO is highly undervalued. It appears it’s being punished because of it being a tech company, which is assumed to experience declining earnings in an environment of rising interest rates.
But GXO Logistics, Inc. continues to grow organically and via acquisitions, and with demand accelerating, I don’t see the type of headwinds in 2023 that would disrupt the growth trajectory of the company.
The share price of the company, even after its solid performance in the third quarter, will likely remain subdued, even though there will probably be a bounce in response to its solid earnings report.
I consider this a good entry point and using a dollar-cost averaging strategy, I think this would be the time to seriously consider taking a position in GXO because of strong demand resulting in some big wins, which at this time don’t seem to be slowing down.
When interest rates start going down, GXO’s share price is going to soar. It may take time and shareholders have to endure some volatility, but patient investors are going to be rewarded once market sentiment improves and tech stocks regain favor in the eyes of investors. GXO is positioned very well for when that happens.
I like the momentum of the company in a time of accelerating demand for the type of logistics that help companies cut costs while increasing productivity. Demand is only going to increase in those vital areas for GXO Logistics, Inc. in the months and years ahead.
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