At a time when artificial intelligence (AI) has captivated the market, investors might overlook the business of contract logistics, or receiving, holding, and shipping goods. But that doesn't mean that there aren't opportunities in the sector.
One of the most attractive right now is GXO Logistics (GXO -0.06%). It's the world's largest pure-play contract logistics company, with nearly 1,000 high-tech warehouses around the world. The company is nearly two years old now, spun off from XPO Logistics in August 2021 to streamline both businesses so the market could value them accordingly, rather than as a combined conglomerate.
GXO took that mandate and ran with it, acquiring Clipper Logistics, a U.K.-based contract logistics company, last year in part to further its expansion into Europe. The company just made what might be its biggest move in that arena so far, announcing a new expansion in Germany, Europe's biggest logistics market.
Image source: GXO Logistics.
A new growth opportunity for GXO
In a press release, last week, GXO said it's beginning a multiyear plan to significantly expand in Germany, a contract logistics market worth an estimated $20 billion in revenue per year.
The company is opening a 387,000-square-foot, state-of-the-art warehouse in the Dusseldorf region, which it expects to serve as a launchpad for further expansion in Germany.
GXO has only about 1 million square feet of capacity in Germany currently. By comparison, its facilities around the world total around 200 million square feet, meaning the company is significantly underrepresented in Europe's biggest market.
The German market also seems ripe for a company like GXO to thrive as the company aims to consolidate its market share in the fragmented global logistics market. For example, GXO made reverse logistics, or processing returns, one of its core competencies, and about a third to half of all relevant items sold in the German market are returned, creating a premium for reverse logistics capabilities.
Germany also has a large number of multinational companies operating that are already GXO customers, including Kellogg, Bayer, and BASF. In addition, the new facility will have the capacity for automation, as 30% of its business is automated.
In an interview, GXO Chief Investment Officer Mark Manduca explained that GXO gained a number of multi-tenant warehouses that are highly profitable, and the company aims to extend that strategy in Germany, where it will compete with DHL, the market leader, and a number of smaller third-party logistics companies, from which it sees an opportunity to gain market share. Combined, GXO and DHL have about 15% market share in North America and Europe, meaning small players still hold the vast majority.
Meanwhile, trends like nearshoring, outsourcing, and automation that support GXO's growth broadly are also in play in Germany.
The long-term plan
GXO's expansion plan won't change its guidance, as the company factored in the opportunity when it gave its fiscal 2027 targets, which it reaffirmed at its Investor Day conference in January.
The company expects to generate $17 billion in revenue, or a compound annual growth rate (CAGR) of 8% to 12% from 2021 to 2027. It's also targeting $1.6 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). That represents a CAGR of 17%.
Those growth targets show the company is gaining market share thanks to its global footprint and investments in areas like automation as it benefits from increased demand for outsourced logistics.
In the first quarter, GXO delivered solid growth in a challenging macroeconomic environment in the first quarter. Revenue rose 12% to $2.3 billion, with organic revenue up 7%.
At its current price, GXO trades at just 5 times its 2027 EBITDA target. While that's still years away, the company is making solid progress toward the goal and will probably be in an even stronger competitive position by then as it capitalizes on opportunities like Germany and takes advantage of a fragmented global market.
While the stock could be volatile in the near term as the global economy remains shaky, GXO has the makings of a long-term winner as it leverages its competitive advantages in new markets like Germany.
