In tough economic times, transportation companies tend to get hit hard.

After all, the industry depends on companies shipping goods, and in order for shipments to increase, consumer demand must also be growing.

Some transportation companies already indicated the economy is heading south. FedEx, for example, pulled its guidance for the fiscal year back in September, and CEO Raj Subramaniam said he believes a global recession is on the way. In addition, trucking company Yellow just reported a 19% decline in tonnage per workday in its third-quarter earnings report, showing declining demand.

However, one company appears to be bucking the trend in the transportation industry: XPO Logistics (XPO -1.55%). It just became a pure-play less-than-truckload (LTL) operator following its spinoff of RXO, its former truck brokerage division, and the company's third-quarter earnings report shows why the new XPO could be a great opportunity for investors right now.

An XPO truck on the highway.

Image source: XPO Logistics.

XPO is moving in the right direction

The company just posted record revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in LTL. Revenue rose 12.4% to $1.2 billion, while adjusted EBITDA increased 16% to $258 million, giving the company an EBITDA margin of 21%.

Better yet, tonnage trends were positive, showing the company is overcoming any macroeconomic headwinds.  

Outgoing CEO Brad Jacobs said, "Our year-over-year tonnage accelerated every month through the quarter and inflected positive in September, with more improvement in October. Importantly, our third quarter tonnage trend outperformed typical seasonality, bucking industry trends." The company also called for tonnage to continue through the fourth quarter, a sign it's continuing to gain market share. 

On the earnings call, incoming CEO Mario Harik said that capacity in the industry actually fell over the past decade. That means that prices should continue to rise even in a softer macro environment, though only by low single digits, while prices could increase by high single digits or even low double digits in a stronger economy.

Management also expects its operating margin to continue to improve, calling for year-over-year expansion of 120 basis points in the fourth quarter. And the company continues to grow its network, adding new terminals.

The long-term outlook

At its recent investor day, XPO outlined its strategy to gain market share and grow revenue and profits over the coming years. The company is manufacturing trucks and adding new drivers through its own driving school to ensure it has sufficient labor and vehicle supply. It also plans to insource the 10% of its business that currently goes to third-party carriers, which will improve profitability.

Through the next five years, XPO forecasts annual growth of 6% to 8% in organic revenue and 11% to 13% in adjusted EBITDA. With 8% market share today and 36% return on invested capital, XPO has both an appealing long-term growth opportunity in front of it and a track record of generating strong returns. It also operates in an industry with high barriers to entry, limiting competition, which will make it easier to gain market share.

Jacobs, the outgoing CEO and now executive chairman, built XPO into a diversified logistics company over the past decade, but he came to believe that the company was undervalued due to a "conglomerate discount." 

As a result, XPO spun off GXO Logistics (GXO -0.57%) last year, its former contract logistics divisions, and has now separated RXO, leaving XPO as a pure-play LTL company that can be easily compared with its peers. The company expects the combined price of XPO and RXO to be greater than it would have been as one company. Last year, the market reacted favorably to the GXO spinoff, confirming Jacobs' thesis, and it wouldn't be surprising to see the RXO separation unlock value as well.

Based on its current price, XPO looks cheap, trading at less than 4 times run-rate EBITDA as the stock has fallen this year on macro worries. 

If XPO can simply execute on its adjusted EBITDA guidance above, that should be enough for the company to outperform the market. Not only does that imply that EBITDA would nearly double over the next five years, but the stock is likely to benefit from significant multiple expansions if the company can deliver on that guidance and continue to take market share. That's a formula for the stock to double or even triple in the next five years.