GXO Logistics Stock: FY23 Guide Is Conservative (NYSE:GXO)

Overview

GXO Logistics (NYSE:GXO) is a top-rated contract logistics supplier globally, poised to benefit from supply chain disruptions and a surge in e-commerce adoption. The purchase of Clipper has bolstered its foothold in the UK, and its organic growth prospects seem promising, with a growing list of potential new business opportunities. In my opinion, GXO is a good investment at its current price, as I anticipate it will achieve its FY27 objectives. As GXO demonstrates its progress towards achieving Fy27 guidance, it’s likely that consensus will align with my views (revising estimates upward).

4Q22 earnings

Revenue and adjusted EBITDA for GXO’s 4Q were both higher than anticipated. The EBITDA margin of 8.3% was in line with expectations, and the growth in organic revenue was the main factor in the EBITDA beat. GXO generated $141 million in FCF in the same quarter, for a full year total of $240 million. FY22 revenue came in at $8.99 billion with adj. EBTIDA of $728 million. Given GXO’s strong earnings visibility, the results came as no surprise.

Clipper

I was relieved to hear that GXO is well on its way to realizing the cost savings it had previously announced, and that its management team anticipates realizing most of these savings within the first two years. These projected savings in cost should lead to a modest increase in revenue (mid single digits %) from FY22 revenue base. In addition to these cost synergies, GXO has signed its first customer, leveraging an existing relationship with Clipper along with GXO’s unique capabilities. The 4Q report highlighted the first of what I expect to be many cross-selling opportunities as Clipper customers transition to GXO, and I believe there are substantial revenue synergies as a result. The fact that management now sees significant cross-selling prospects from the Clipper acquisition supports my view, as the sales pipeline increased from $2.0 to $2.1 billion in 3Q22. Long term, I have no doubt that Clipper will become an important part of GXO’s bottom line.

Conservative guidance

The guidance for GXO’s FY23 that was provided a month ago was reiterated, with the company expecting organic revenue growth of 6-8%, adjusted EBITDA of $700-$735 million, and adjusted EPS in the range of $2.30-$2.50.

In my view, the guidance provided by GXO was somewhat conservative, and I am confident that they will either meet or exceed their revenue growth target. As of 2022, GXO has already secured new wins, which will result in $661 million in incremental revenues for 2023, translating to a 7.3% growth rate based on the FY22 revenue of $9 billion. Based on the historical churn rate of 4%, the 7.3% growth would translate to 3.3% growth. This implies that GXO only needs to achieve another 2.7% growth to hit the low end of the guide, which I believe is quite feasible. This remaining growth could potentially come from price hikes due to inflation or organic volume growth on existing contracts. Additionally, if GXO aggressively pursues new contracts, it is possible for them to exceed the top end of the guide. Moreover, when we take into account the acquisition of Clipper, the guide appears overly cautious. With a full year of contribution from Clipper in FY23, we should expect to see a boost in overall growth (Clipper provided only 6-7 months revenue contribution in FY22). After adjusting for low-single digits FX headwinds, I anticipate that Clipper will easily add 200 to 300 basis points of growth in 2023.

Overall, I think revenue growth could be more than 10% if we add all the factors I mentioned above together, possibly leading to >$10 billion in revenue.

Conclusion

In my opinion, GXO has a proven track record of meeting or exceeding its guidance. The question now is whether the company can achieve its ambitious FY27 guidance, which calls for significant EBITDA growth. Although some investors may view this as a lofty goal, I believe that GXO’s leading position as a pure-play contract logistics provider and its strong track record suggest that it is possible. Currently, the market may not be fully factoring in this long-term target, which could become a self-fulfilling catalyst if GXO continues to demonstrate progress towards achieving it – i.e., consensus will continue to revise earnings estimates upwards. As a result, I think that GXO is a worthwhile investment at its current price given its strong business model and performance history.