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I started a new position today in GXO Logistics, the worldâs largest pure-play contract logistics provider. In this article youâll learn:
1) How GXO will benefit from AI
2) What makes it a compounding machine
3) Why now is the time to enter
Total revenue grew 19.7% Y/Y, of which 3% was organic, to $11.7B, supported by strong growth in omnichannel retail (+30.7% Y/Y). GXO closed more than $1B of new business wins, of which 60% was e-commerce, and won a landmark $2.5B LTV contract in the health sector. The landmark deal came from the Clipper acquisition, showcasing the continued synergies management is reaping from acquisitions, and Germany is now the fastest growing market, with revenues growing 60% Y/Y in FY24. Market share continues to grow as 46% of FY24 contract wins were from sites transferred from other 3PLâs. Furthermore, $627M of FY24 business wins are signed as incremental FY25 revenue. Organic revenue % growth continued its sequential uptrend in FY24, closing the year with +3.9% Y/Y growth in Q4â24. Adjusted EBITDA met midpoint guidance of $815M in FY24, with a $45M Wincanton EBITDA contribution. FCF reduced to $251M from $302M in FY23 due to $70M in transaction and integration costs in FY24.
How GXO will benefit from AI
Operational Efficiency: GXO is piloting AI-enhanced robotics in warehouses, which can de-palletize, label, and re-palletize packages with human-like capabilities. These smart robots self-train on the job, improving their performance with every pick.
Productivity Boost: The implementation of AI-powered solutions has led to substantial productivity gains. For instance, GXO's use of KĂśrber's Operator Eye AI solution has cut picking errors by 75%.
Cost Reduction: By leveraging AI technologies, GXO can reduce operational costs. The company's technological investments allow them to earn margins 200 basis points higher than the industry average.
Environmental Impact: AI solutions have helped GXO reduce emissions in its supply chain operations. In one case, AI implementation led to a reduction of 900,000km in travel distance from a single depot, saving 25,000 liters of diesel and 720 tonnes of carbon emissions.
Enhanced Safety: AI-powered robots and systems improve warehouse safety by handling repetitive and potentially dangerous tasks, allowing human workers to focus on higher-value activities.
Improved Accuracy: AI technologies like warehouse vision tech have been deployed to reduce errors in operations, with GXO doubling its use of such technology last year.
Scalability and Flexibility: AI-enhanced modular technologies allow GXO to easily adapt to changing demands and product lines, providing valuable flexibility for customers.
Data-Driven Insights: GXO uses AI to capture and analyze data, providing insights that help improve operations and services to customers, such as identifying problematic package designs.
Enhanced Security: GXO is expanding its use of AI for site security, employing devices that perform video surveillance, analytics, and create virtual barriers for high-value inventory protection.
These AI advancements position GXO at the forefront of logistics innovation, enabling the company to offer superior, cost-effective, and customized solutions to its clients while maintaining a competitive edge in the industry.
What makes it a compounding machine
Chairman Brad Jacobs spun off GXO from XPO in August 2021. Here a comparison:
Why now is the time to enter
Resources:
GXO Logistics' profitability showed mixed results in 2024:
Revenue Growth: GXO reported record revenue for both the fourth quarter and the full year 2024. Full-year revenue reached $11.7 billion, a 20% increase compared to 2023. In Q4, revenue increased 25% year over year to $3.3 billion.
Organic Revenue Growth: Organic revenue growth accelerated sequentially each quarter in 2024.
Net Income: The full-year net income declined to $138 million, from $233 million in 2023. However, net income for the fourth quarter increased to $100 million, compared to $73 million for the fourth quarter of 2023.
Adjusted EBITDA: Adjusted EBITDA grew to $815 million from $741 million for the full year. In the fourth quarter, adjusted EBITDA reached $251 million, up from $193 million in the same period the previous year.
Earnings Per Share (EPS): Diluted earnings per share increased to $0.83 in Q4 2024, from $0.61 during the same time the previous year. Adjusted EPS rose to $2.80 from $2.59 for the full year.
Free Cash Flow: Free cash flow decreased to $251 million from $302 million for the full year. initial reaction off earnings was negative with a 15% drop. I believe this is for a few reasons.
Sentiment around GXO right now is very low because wall street interprets these tailwinds as being structural. We see them as being one-offs.On an EV/EBITDAR basis, GXO continues to trade at a substantial discount relative to logistics industry peers:
GXO 4.7x
Deutsche Post AG 7.0x
DSV 12.2x
The CEO is retiring, as planned, and finding a new CEO might take until summer. The stock price dipped -15%. Markets donât like uncertainty. At the same time, today GXO Logistics Announced $500 million share repurchase authorization, which is around 10.4% of its current market cap. On the Investing Show, we like shares buybacks more than dividends. Especially if they happen when the stock is undervalued. GXO also partnered with Siemens Healthineers to expand and speed up its forward stocking network at two key locations in the U.S.
I see 3 issues with GXO, and I consider them temporary:
The company is still searching for a new CEO, which can take until summer 2025.
The Competition and Markets Authority (CMA) is still reviewing the acquisition and does have the authority to block the deal. Though according to management is is very unlikely that would happen it still weighs on the company.
Some âcustomer capacity realignmentâ affected Q1. âWe have worked with a few of our large customers to realign their footprints to fit their future needs.â
These are short term issues for the company that will push out the timeline of their growth by a little bit. But likely an overreaction that is backed up by the 8.5% bounce back the day after. I am not saying these are a non-issue. Just short term ones. And this is exactly the setup I like: strong fundamentals coupled with bad sentiment. Thatâs why GXO made it from my watchlist, to being the 12th company in my portfolio.
Catalysts for a short-term rebound:
⢠Quarterly earnings beats: As noted earlier, mgmt. has a strong track record of setting conservative guidance and beating consensus estimates, and the FY25 guide sets them up well to do so.
⢠Insider purchases: The last insider buy was on 06/11/2024 at $49.95/share by the current CEOâwell above todayâs levels. (Note: A share repurchase plan in FY25 is unlikely as mgmt. focuses on deleveraging.)
⢠Affirmation of 2027 targets: Although maintaining 2027 targets seems unlikely given the one-off impacts in FY25, an affirmation from the new CEO could boost investor confidence.
Risks:
⢠Tariffs Exposure: Although management expects minimal impact due to GXOâs domestic focus, a significant increase in product prices would dampen customer volumes.
⢠Rising Direct Operating Expenses: Since the Wincanton Acquisition, this line item has gradually increased as a % of total revenues. I project 84.20% in FY25 up from 84.15% in FY24, reflecting delayed Wincanton synergies and start-up costs associated with network realignments. The effect of Wincanton integration on these costs remains a key variable.
⢠CMA review risk: An unfavorable outcome on the Wincanton CMA review will disrupt growth prospects in new verticals and the UK.
Many of you asked for my watchlist this week. Access my complete watchlist in our community.
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