The past six months have been a windfall for RXO’s shareholders. The company’s stock price has jumped 52.6%, hitting $29.89 per share. This performance may have investors wondering how to approach the situation.
Is now the time to buy RXO, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.We’re happy investors have made money, but we're cautious about RXO. Here are three reasons why you should be careful with RXO and a stock we'd rather own.
Why Do We Think RXO Will Underperform?
With access to millions of trucks, RXO (NYSE:RXO) offers full-truckload, less-than-truckload, and last-mile deliveries.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for years. Over the last four years, RXO grew its sales at a mediocre 6.2% compounded annual growth rate. This was below our standard for the industrials sector.
2. EPS Took a Dip Over the Last Two Years
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Sadly for RXO, its EPS declined by more than its revenue over the last two years, dropping 74.3%. This tells us the company struggled to adjust to shrinking demand.
3. Short Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
RXO burned through $36.69 million of cash over the last year, and its $703 million of debt exceeds the $55 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the RXO’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of RXO until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
We cheer for all companies making their customers' lives easier, but in the case of RXO, we’ll be cheering from the sidelines. After the recent surge, the stock trades at 54.5x forward price-to-earnings (or $29.89 per share). At this valuation, there’s a lot of good news priced in - you can find better investment opportunities elsewhere. We’d recommend looking at ServiceNow, one of our all-time favorite software stocks with a durable competitive moat.
Stocks We Like More Than RXO
With rates dropping, inflation stabilizing, and the elections in the rearview mirror, all signs point to the start of a new bull run - and we’re laser-focused on finding the best stocks for this upcoming cycle.
Put yourself in the driver’s seat by checking out our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,691% between September 2019 and September 2024) as well as under-the-radar businesses like United Rentals (+550% five-year return). Find your next big winner with StockStory today for free.
