The stock of XPO (XPO -1.25%) was one of the biggest winners of the last decade, and the less-than-truckload (LTL) carrier has continued in recent years, as the stock has quadrupled since early 2023.

Those gains followed the spinoff of both GXO Logistics and RXO, its former truck brokerage division.

Like its peers including Old Dominion Freight Lines and Saia, XPO continues to face headwinds from a "freight recession" that has lasted for about two to three years as manufacturing activity and industrial production have mostly contracted during that time.

Nonetheless, the carrier has found new ways to grow its bottom line and improve margins, and those trends were on display in its second-quarter earnings report.

An XPO driving through a city at night.

Image source: XPO.

XPO clears the Wall Street bar

In a difficult macro environment, XPO reported flat revenue at $2.08 billion, which topped estimates at $2.05 billion.

Revenue in the core North American LTL business (carriers that specialize in transporting smaller shipments that don't require a full truckload) was down 2.5% to $1.24 billion, while its European Transportation segment rose 4.1% to $841 million. Tonnage was down 6.7% per day, but the company made up for the decline in volume with an increase in yield (or price) of 6.1%, excluding fuel.

Price increases were driven in part by service improvements like reducing damage claims and improved on-time performance that have allowed the company to raise prices. And it has found growth in the local market, serving small to medium-size businesses in need of local transportation.

XPO was the only one of the three top LTL carriers to improve its adjusted operating ratio, which is the inverse of operating margin, in North America, which fell 30 basis points to 82.9% (a lower ratio is an indication of higher efficiency).

Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) were essentially flat, falling from $343 million to $340 million, while adjusted earnings per share (EPS) fell from $1.12 to $1.05 as it lapped a tax benefit from the year before. That result still beat the consensus at $0.99.

Investors seemed to shrug off the news as the stock was down slightly following the results and the earnings call, but XPO could please investors in the back half of the year. Let's take a look at a few reasons why.

1. Share buybacks are set to resume

Historically, share repurchases have been a key tool for XPO to generate shareholder value, and it has deployed them effectively.

The company began repurchasing its stock again in the second quarter, buying back a modest $10 million, and chief strategy officer Ali Faghri said in an interview with The Motley Fool that he expected those repurchases to pick up in the second half of the year, the time of year when it brings in the vast majority of its free cash flow due to the seasonality of its capital expenditures (capex).

After years of ramping up capex to invest in new tractors, trailers, and terminals, the company expects capex as a percentage of revenue to start to decline, freeing up cash to invest in share repurchases and paying down debt.

Both of those moves should help lift EPS as debt reduction will lower its interest expense, which ate up more than a quarter of operating income in the second quarter, and lowering shares outstanding will boost per-share earnings even if net income remains flat.

2. Nearshoring could drive growth in the industrial economy

Growth in the LTL sector and for XPO in particular is closely tied to manufacturing activity in the country, and according to the ISM Manufacturing Purchasing Managers Index (PMI), manufacturing activity has been declining for most of the last three years.

It's unclear if trade negotiations have had an impact so far on XPO's business, but Faghri was optimistic that the new round of tariffs could help encourage nearshoring, or the return of manufacturing to the U.S., which would be a boon to XPO since two-thirds of its business comes from industrial customers. More U.S manufacturing would drive demand for LTL transportation, and could fuel a boom in the industry after years of stagnation.

3. Its local business is accelerating

Despite the overall headwinds in tonnage, XPO is finding growth in the local channel, where a combination of investing in a local sales force and improvement in service quality through lower damage claims and improved on-time percentages have helped it attract more local business. That segment grew by high single digits in the second quarter, according to Faghri.

That's also a key strategic initiative for the company since those tend to be higher-margin customers. Over the longer term, XPO aims to grow its share of revenue from the local channel from 20% to 30%. That figure is now in the low-to-mid 20% range, indicating more runway ahead as it grabs market share in that segment.

Overall, XPO remains on track to achieve the 2027 goals it announced in 2021, which include compound annual revenue growth of 6% to 8%, compound annual adjusted EBITDA growth of 11% to 13%, and a 600-basis-point decline in adjusted operating ratio, meaning it would improve to 81%.

With three potential growth drivers for the second half of the year, XPO appears to be in position to deliver strong results for investors, even as the broader freight market is still weak.