We came across a bearish thesis on GXO Logistics (GXO) on ValueInvestorsClub by oldyeller. In this article we will summarize the bears’ thesis on GXO. GXO Logistics shares were trading at $53.13 when this thesis was published, vs. closing price of $49.34 on Aug 29.
A bustling distribution center, a sign of a thriving logistics business.
GXO Logistics, a prominent player in the logistics sector, has made significant strides in delivering end-to-end supply chain solutions. Spun off from XPO Inc in August 2021, GXO focuses on contract logistics, providing critical services such as warehousing, distribution, and transportation management. These capabilities are vital for industries ranging from retail to automotive and technology, positioning GXO as a key player in optimizing complex supply chains.
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Despite its robust service offerings and extensive client base, recent developments suggest that GXO may not be the investment opportunity it once seemed. The company’s strategic shift, marked by its separation from XPO and the subsequent divestiture of RXO Inc in 2022, raises concerns. Brad Jacobs, a renowned entrepreneur who founded and built XPO, had long championed the consolidation strategy now abandoned. Jacobs’ reduced equity stake in GXO to just 1% and Director Gena Ashe’s substantial sale of her stock further highlight a lack of confidence in the company’s future.
The underlying issues become more apparent when examining GXO’s operational performance. Recent management changes, including the departure of Eduardo Pelleissone as President of the Americas, have led to a problematic restructuring of customer service teams. Pelleissone’s decision to cut experienced staff and replace them with less seasoned personnel has resulted in deteriorating service quality. This has manifested in increased customer churn, with GXO’s fourth-quarter 2023 organic growth declining to -2%, a stark contrast to its peers’ growth rates.
Management attributes this downturn to macroeconomic uncertainties, but this explanation seems disingenuous given the feedback from industry contacts. Furthermore, while GXO claims an impressive 30%+ operating return on capital, the reality is a much lower 2%-3% return on invested capital, suggesting potential manipulation or misrepresentation of financial performance.
Adding to the concerns, our research indicates that GXO’s work environment under Pelleissone was characterized by high attrition and a negative culture, exacerbated by his previous SEC fines for accounting misconduct. These factors have likely contributed to a broader issue of underperformance and questionable management practices.
Given these challenges, our projections suggest that GXO’s organic growth will continue to decline, potentially reaching -1% over the next two years. With annual margin erosion expected at 25 basis points, the company’s 2025 EBITDA is projected at $688 million, significantly below the consensus estimate of $861 million. This discrepancy highlights the disconnect between market expectations and the company’s actual performance.
In light of these issues, GXO’s stock price is likely to experience a substantial decline. We anticipate that it could trade near its historical low valuation range of approximately 9x EBITDA, translating to a target price of $21 per share—nearly 60% below its current level of $53. Compared to its peers, which have higher growth rates and better margins, GXO’s lower performance metrics and market conditions justify a discounted valuation.
GXO is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 40 hedge fund portfolios held GXO at the end of the first quarter which was 38 in the previous quarter. While we acknowledge the potential of GXO as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as GXO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
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