GXO Logistics (GXO 2.90%) has a big future. Outsourcing logistics may not seem like the most exciting business out there. However, its solutions are at the cutting edge of technologies that will revolutionize how the world works. At the same time, its end markets are poised for long-term secular growth due to powerful megatrends. This makes GXO a highly attractive stock to buy. Here's why.
GXO Logistics
The company is a contract logistics provider that designs and operates high-technology warehousing and distribution centers for clients. According to the company's last 10-K SEC filing, GXO has "131,000 team members and 974 facilities worldwide totaling 199 million square feet of space. It operates these facilities on behalf of large corporations that have outsourced their warehousing, distribution, and other related activities. Its customer list includes blue chip companies such as oil giant BP, PepsiCo, Samsung, LVMH, Boeing, and Carrefour.
Image source: Getty Images.
Management defines its major secular growth drivers as follows:
- The trend toward outsourcing logistics as companies are looking to focus on their core strengths while leaving GXO and others to manage logistics
- E-commerce growth as its share of retail spending continues to rise and the concomitant growth in warehousing and logistics it produces
- The need to improve "supply chain resilience" in light of global trade patterns toward nearshoring and reshoring
I would add another driver that plays through all of these drivers: the step change in productivity generated by the growing use of technologies such as automation, robotics, AI-powered solutions, and advanced software analytics. Simply put, these technologies enhance the productivity of GXO's solutions, which means more value is added to customers, and, in turn, there is more demand for GXO.
As such, it benefits from the rapid increase in the power of these disruptive technologies, and its solutions bring tangible benefits to customers.
What went wrong?
Given such strong underlying earnings drivers, investors can ask why the stock trades at more than 52% off its all-time high.
GXO Percent Off All-Time High data by YCharts
The answer lies more in the economy's evolution over the last few years than in anything fundamentally wrong in GXO's business. The pandemic brought forward substantive investment in e-commerce warehousing in response to the boom in online shopping created by the stay-at-home measures.
However, such booms don't last, and as the lockdown measures subsided, spending patterns shifted, making year-over-year comparisons for companies exposed to the market very difficult. As the table below demonstrates, GXO's growth declined noticeably in 2023, and the decline in the share price reflects its slowing end markets.
|
Metric |
2021 |
2022 |
2023 |
2024 Est |
|---|---|---|---|---|
|
Organic revenue growth |
15% |
15.4% |
2% |
2%-5% |
Data source: GXO Logistics presentations.
That said, some context is needed. The e-commerce/warehousing spending boom doesn't reflect GXO's long-term growth rate, nor does the correction that came after it. In quantitative terms, GXO isn't a 15% annual growth business, but neither is it a 2% yearly growth business, and it's a mistake to price it in as either.
Where the market is now
GXO's management believes its growth will accelerate through 2024, with the fourth quarter of 2023 expecting to be the bottom. However, the near-term outlook from other companies with warehouse/logistics spending exposure is mixed. Honeywell has a warehouse automation business, but it remains in a trough with Honeywell CEO Vimal Kapur noting on the recent earnings call that the "pipeline remains strong, but order conversion is weak, specifically in the project side."
Data source: Honeywell presentations. Chart by author.
On the other hand, Cognex, a machine vision company whose technology is used in e-commerce fulfillment centers, sees its logistics end market returning to growth in 2024 after two years of 20% plus declines.
It's a confusing picture, but perhaps the best way to think of it is as a market making a tentative recovery without the kind of large project orders that will move the needle for Honeywell.
Is GXO a stock to buy?
It's difficult to time the bottom of the market at the best of times, and there may be more turbulence for GXO in 2024. Still, the long-term outlook is excellent and stocks are rarely a good value when the company is firing on all cylinders.
However, whenever the exact bottom occurs, this looks likely to be a trough year for e-commerce warehousing and logistics spending, and the long-term secular drivers of GXO's business should lead to significant revenue and earnings growth. Management sees double-digit and mid-teens growth for the two metrics over the medium term.
Trading on 18 times estimated 2024 earnings, GXO is an excellent value stock.
