You've probably never heard of it, but GXO Logistics (GXO +0.12%) is the world's largest pure-play contract logistics company -- and it's been performing some logistics of its own lately to reposition the business.
To help unlock its value, the Greenwich, Connecticut-based company was spun off from its parent company, XPO, in August 2021. Former XPO CEO Brad Jacobs argued that the combined businesses were undervalued and that separating them into two companies would allow each to realize its proper value.
Then last year GXO acquired Clipper Logistics, a well-regarded U.K. logistics company, in a $1.3 billion deal. Clipper boosted GXO's reach in continental Europe, gave it valuable resources in areas like e-commerce and reverse logistics, and also offered significant exposure to the life sciences industry.
Now, GXO has taken another major step forward in its integration of Clipper, launching GXO Direct in the U.K. last week. Let's see what this could all mean for investors.
Image source: GXO Logistics.
What is GXO Direct?
GXO Direct is the company's shared-space solution that offers its clients flexibility and often greater proximity to the end customer.
Most of GXO's warehouses are contracted to one tenant, but GXO Direct offers another option for customers, one that's become more appealing in an uncertain economic environment with inflation and interest rates elevated in the U.K. and elsewhere: flexible space, which allows GXO Direct customers to scale up and down with seasonal spikes.
The company will launch GXO Direct in the U.K. with 30 locations covering the entire country, serving companies of all sizes from a broad range of sectors, including Liberty's of London, Sosandar, and Fujitsu.
In an interview with The Motley Fool, GXO Chief Investment Officer Mark Manduca noted some of the advantages of GXO Direct for the company, including that it offers higher margins than its standard warehouse business as it benefits from its value-added services.
GXO brought in $300 million of revenue from the Direct business last year. It has 14 Direct hubs in the U.S., and Manduca said the business is growing "very strongly" and seeing "huge demand from companies who want to get closer to their end customer." In particular, the program has been popular with small and medium-sized customers.
Adding the Direct business to its arsenal in the U.K. is also key because that country has become GXO's biggest market. In 2022, revenue from the U.K. was $3.3 billion, or 37% of its total revenue, just ahead of the U.S., where it brought in $2.9 billion in revenue last year.
NYSE: GXO
Key Data Points
What's next for GXO
As a logistics business, GXO isn't immune to volatility in the global economy, and it grows with its customers as they get more end-market demand. In its guidance for the year, GXO called for revenue growth of 6% to 8% this year, a deceleration from 2022, but a solid forecast in the current market.
Manduca said that of the company's three markets, North America is still holding up, with industrial and consumer spending remaining stable. Continental Europe, meanwhile, is seeing signs of strength in areas like luxury goods, and the U.K. market is lagging behind the other two.
Expansion of the Direct business is one factor in the company's long-term guidance. By 2027, the company expects to reach $17 billion in revenue, representing an 8% to 12% organic annual growth rate. And GXO expects adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to total $1.6 billion -- or a 17% compound annual growth rate.
At a market capitalization of just $6 billion and with its industry-leading position, investments in technology and automation, and growth in areas like Direct, GXO looks like a good bet to outperform if it can hit that long-term guidance.
