After surging out of the gate in 2021 following its spin-off from XPO Logistics, GXO Logistics (GXO +0.38%) shares cooled off last year.
The world's largest provider of pure-play contract logistics services fell 53% in 2022, even as the company delivered strong results. The pullback in the stock seemed to have more to do with broader concerns about a global recession, a slowdown in e-commerce demand, and the impact of inflation than the company's own performance.
By the numbers
GXO shared its preliminary results for 2022 at its recent Investor Day conference, reporting $9 billion in revenue, up 14% from $7.9 billion, and $725 million in adjusted EBITDA, up 16% from 2021 levels.
The company's guidance for 2023 indicates that GXO is feeling some of the headwinds in the broader economy, calling for revenue growth of 6%-8% this year and for EBITDA to be essentially flat at $700 million-$730 million. In an interview with The Motley Fool, Chief Investment Officer Mark Manduca explained that the diminished EBITDA growth is primarily a result of increased pension expenses in the U.K. to adjust for market movements last year as well as increased foreign currency headwinds due to the stronger dollar.
However, the big news to come out of the presentation was the company's 2027 financial targets, the first time it's provided long-term guidance. GXO expects 8%-12% organic compound annual revenue growth over that period, equal to $17 billion in revenue by 2027. It is also projecting an EBITDA compounded annual growth rate (CAGR) of 17%, growing to $1.6 billion in EBITDA by then. From 2021 to 2027, the company also expects to generate $2 billion in free cash flow.
Image source: GXO Logistics.
The GXO Difference
GXO expects its growth over the next five years to come from a rising tide in the logistics industry due to trends like outsourcing, e-commerce, demand for supply chain resilience, and overall economic growth, and the company's ability to gain market share through what it's calling the GXO Difference.
First, outsourcing and e-commerce should continue to be significant tailwinds. More companies are outsourcing their warehouse operations to save money and improve efficiency, especially after the supply chain challenges of the last two years. As Manduca explained, nearshoring has also become more popular as companies look to establish fulfillment centers close to their customers to avoid some of the supply chain delays that crippled the global economy in 2021 and 2022. Companies are also planning to hold higher levels of inventory to avoid future shortages.
E-commerce is also expected to gain share of overall retail, approaching 30% of retail spending by 2027. GXO says its facilities are able to handle triple the activity of a wholesale warehouse, and six times the activity with "reverse logistics" or processing returns, a significant challenge for e-commerce operators.
In addition to its secular tailwinds, GXO also expects to gain market share through its technology advantage, including its robotics and automation, such as collaborative robots and robotic arms. The company says 30% of its warehouses are tech-enabled, compared to just 8% in the industry. Its scale is also unmatched among pure-play warehouse operators, as it operates in 27 countries with 974 warehouses and more than 20 million total square feet of fulfillment capacity.
Those attributes have helped GXO outgrow its peers. More than half of its revenue comes from companies doing business in multiple countries and 84% comes from customers using multiple GXO sites. Those advantages have also created a flywheel effect as customers increase their spending with GXO once they see the effects of outsourcing warehouse operations to the company.
NYSE: GXO
Key Data Points
Is GXO Logistics a buy?
The path to 8%-12% organic revenue growth over the next five years seems clear based on factors like outsourcing, e-commerce, and the company's own market share gains, and profitability should improve as the company gains scale.
After last year's sell-off, the stock also looks well-priced at less than 9 times 2022 EBITDA, or less than 4 times its EBITDA target for 2027. Meanwhile, the $2 billion in free cash flow the company expects to generate should give it opportunities for more M&A, to improve operations through new technology, or to return cash to shareholders, adding to its upside potential.
As the leader in a fragmented industry with a clear growth plan ahead, GXO looks well-positioned for the long term, and the stock is trading at a discount after last year's slide. If it executes on its plan, the stock should be a market-beater over the coming years.
