XPO and RXO stocks are severely overvalued: buy, sell, or hold?

XPO and RXO stocks have done well this year as they continued beating the S&P 500 index. XPO has risen by over 30% while RXO has jumped by 22.35%.

This is a trend that has been going on for a long time. In the last 12 months, the two companies have risen by 55.95% and 51.30%, respectively, giving them a market cap of over $13 billion and $3.34 billion, respectively. 

RXO and XPO are big names in logistics

The US economy relies heavily on the trucking industry, which moves over 80% of all cargo in the country.

Trucking is a highly fragmented business because of its relatively low barriers to entry since all one needs is to buy a truck. 

However, the industry has some big players like Knight-Swift Transportation, JB Hunt, XPO, and Old Dominion. 

XPO is a giant company that offers logistics services in the United States and in Europe. In the US, it has a market share of about 8% In Europe, it offers solutions to companies like Spain and the UK. 

XPO’s business has gone through big changes as the management has simplified its operations. As part of this transition, it separated its operations into three segment. XPO focuses on the less-than-truckload industry.

GXO focuses on logistics and supply chain management, including works like warehousing and fulfillment. RXO, on the other hand, is in the asset-light transportation industry. XPO also sold its North American intermodal business. 

XPO’s business generates over $7.7 billion in annual revenue and a net income of $189 million, making it a low-margin company. 

The same is true with RXO, which made over $3.9 billion in revenue and a net income of just $4 million. Most of the costs go to transportation, services, and labor. 

Recent earnings review

The most recent financial results showed that XPO and RXO had a mixed performance in the last quarter as the industry went through challenges.

XPO’s revenue rose by 8.5% in the last quarter to over $2.079 billion while its net income came in at $150 million, a 51% increase. 

RXO, on the other hand, saw a 4% increase in volume growth and a slight increase in its gross margin to 19%. Its adjusted EBITDA also dipped slightly to $28 million.

Most of its revenue came from its truck brokerage business followed by last mile and managed transportation.

These companies are expected to do modestly well in the coming years as the Federal Reserve starts cutting interest rates and as inflation retreats. However, labor costs and higher energy prices will be a big challenge.

The other big concern for XPO and RXO is that they are trading at big premiums for companies that operate in a low-margin industry. 

XPO has a forward price-to-earnings ratio of 35 while RXO has a forward multiple of over 200, meaning that they are highly expensive. 

Let us use a very simple approach to demonstrate that they are highly overvalued. XPO has a market cap of over $13.8 billion and is expected to make over $8.69 billion of revenue in 2025. 

It has a net income margin of 4.48% while the sector median is 6.11%. As such, if we are generous enough to give it a multiple of 7%, it means that it will make a profit of $608 million, giving it a forward P/E multiple of 22.7.

RXO, on the other hand, is expected to make $3.8 billion and $4.29 billion in 2024 and 2025 and is still making losses. Using the sector median of 6.11%, we can estimate that its 2025 profit will be $262 million. This means that it is quite overvalued since the company is not expected to make this money.

XPO stock price analysis

The other risk for XPO stock is that it has formed a double-top chart pattern on the weekly chart. In most cases, this is one of the most popular bearish signs in the market. If this happens, it means that it will drop to the neckline at $97 and then continue its downward trend.

RXO share price analysis

The RXO stock price peaked at $32.8 earlier this year, a significant rally from last year’s low of $16.9. It has retreated and moved into a correction zone, falling by over 10% from its highest level this year.

The stock has also moved below the 23.6% Fibonacci Retracement point, a popular bearish sign. On a positive side, it has remained above the 50-day moving average, meaning that bulls are still in control.

Nonetheless, I believe that the stock will remain under pressure for a while. A drop below the support at the 50-day moving average will point to more downside.