XPO Logistics (NYSE:XPO) and Knight-Swift Transportation Holdings (NYSE:KNX) operate in different parts of the transportation sector. Both feel the pushes and pulls of trade wars and economic cycles, though Knight-Swift is primarily exposed only to the U.S. economy, while XPO is more global.

The two companies over the last 10 years have been outperformers relative to their peers. Each has a reputation as being among the better-run transport operators, and both benefit from consolidation-fueled economies of scale. But both have run into speed bumps of late and face uncertain near-term outlooks.

XPO Chart

XPO vs. Knight-Swift data by YCharts.

Investors putting money to work 10 years ago would have done significantly better buying XPO instead of Knight-Swift, but there's an argument to be made that XPO's hypergrowth days are in its past. Here's a look at what's ahead for XPO and Knight-Swift to determine which is the better buy today.

Hitting the brakes on growth

It's been a difficult seven months for XPO, a longtime overachiever that has been stuck in the shop in recent quarters. CEO and roll-up specialist Bradley Jacobs used deal-making to transform this company from a trucking brokerage with $177 million in sales into a $17 billion shipping behemoth in less than a decade, producing an outsized return over a 10-year period ending mid-2018.

XPO Logistics truck on the road.

Image source: XPO Logistics.

But shares of XPO are down about 50% since the beginning of October. It was initially hit by criticism from short-seller Spruce Point Capital. The company's issues were compounded in February, when it missed on earnings in part because of weakness in Europe, and said its largest customer was taking its business in-house.

That large customer is believed to be Amazon.com, and XPO admitted it will take time to fill the gap from the customer loss. XPO on May 1 reported mixed results but said it closed a record $1.1 billion in new business during the quarter, the first step toward proving to investors it can get back on track.

Jacobs, during a post-earnings call with investors, admitted, "We made a mistake letting one customer get $900 million of business with us," adding, "It's just too much concentration." For 2019, XPO expects its top five customers combined will account for just 7% of total sales, and no customer will account for more than 2% of revenue.

XPO has grown into a jack of all trades in the transportation sector, and its growth strategy relies on cross-selling different services to existing customers. It seems to be having some success. The company said that its 26 largest less-than-truckload customers use, on average, five additional XPO services. Ninety of its top 100 U.S. customers use two or more services, and 55 of the top 100 use five or more services.

The company also has high hopes for its Direct business, which aims to be a transport back-office providing non-Amazon retailers and e-commerce companies with integrated logistics, transportation, and delivery service to help them better compete with Amazon's massive scale.

There's so much negativity surrounding XPO right now, it can be easy to forget this is still a profitable company forecasting 3% to 5% revenue growth in 2019 and adjusted EBITDA up 6% to 10%, while increasing free cash flow by $100 million year over year to $625 million. The issue is that growth is a far cry from what investors have grown to expect from XPO. With the company hinting that it is taking an extended break from mergers and acquisitions, it's hard to imagine the previous levels of growth returning anytime soon.

A strong Knight

Knight-Swift, as the name implies, is the product of a 2017 merger between Knight Transportation and Swift Transportation. It ranks as North America's largest full truckload company, operating a fleet of 23,000 tractors and 77,000 trailers. About 80% of its $1.2 billion in quarterly revenue comes from trucking services, with logistics and intermodal services making up the remaining 20%.

The company in April reported first-quarter earnings per share that beat consensus by $0.03, but on revenue that was down 5.2% year over year and came in $100 million shy of expectations. There has been concern throughout the trucking sector that pressure on spot rates would limit pricing power during the current contracting season.

Truck driver in his cab.

Image source: Getty Images.

Knight-Swift post-earnings updated guidance for the quarters to come, projecting second-quarter earnings per share of $0.62 to $0.64 in line with expectations for $0.63, and third-quarter earnings of $0.62 to $0.66, which is just short of the $0.68 consensus estimate.

Knight-Swift is facing pressure on both sides of its business. The core trucking segment was the revenue underperformer, and a combination of pricing pressure, bad weather, and ramifications from the ongoing trade war are headwinds to growth.

The company, like many of its peers, hopes to offset those issues by growing its logistics and intermodal operations, with Knight-Swift management saying on the post-earnings call they would "actively pursue acquisition opportunities." Alas, logistics is getting crowded, and with Amazon seemingly more of a threat to transportation brokerages than it is to asset-heavy operators, it isn't clear that growing the part of the business where Knight-Swift does not currently enjoy advantages of scale will lead to outsized profits.

And the better buy is...

XPO and Knight-Swift operate in very different parts of the transportation sector, but as investments there are a lot of similarities between the two. Both have size and scale advantages, but face threats to core markets.

Both are reasonably valued relative to their peers, with XPO now trading at a multiple of earnings within range of brokerage specialist C.H. Robinson Worldwide, and Knight-Swift trading at a premium to smaller pure-play truckers but below intermodal specialist JB Hunt Transport Services.

Knight-Swift appears to be the more predictable investment. The company has solid leadership, and post-deal has the scale to be a top trucker. But its fortunes are very much tied to the overall health of the economy and the cycles of the trucking industry. XPO is more of a wild card, with a history of outperformance but also of recent headline risk and without any guarantee it will regain its lofty growth trajectory anytime soon.

I'm skeptical XPO will ever again post the sort of growth numbers investors enjoyed over the past decade, but I like the diversity of the business and the potential of XPO Direct. I think Jacobs will eventually resume deal-making. And based on his track record, I'm optimistic that when XPO does get back to buying, the transactions will add value.

For a long-term holder, XPO is the better buy.