What a brutal six months it’s been for RXO. The stock has dropped 33.1% and now trades at $16.84, rattling many shareholders. This was partly due to its softer quarterly results and 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 stock story straight from our expert analysts, it’s free.
Why Do We Think RXO Will Underperform?
Despite the more favorable entry price, we're swiping left on RXO for now. Here are three reasons why there are better opportunities than RXO and a stock we'd rather own.
1. Lackluster Revenue Growth
Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. RXO’s recent performance shows its demand has slowed as its annualized revenue growth of 6.2% over the last two years was below its four-year trend. We also note many other Ground Transportation businesses have faced declining sales because of cyclical headwinds. While RXO grew slower than we’d like, it did do better than its peers. 
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for RXO, its EPS declined by 38.8% annually over the last four years while its revenue grew by 8%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Short Cash 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 $70 million of cash over the last year, and its $685 million of debt exceeds the $16 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 see the value of companies helping their customers, but in the case of RXO, we’re out. Following the recent decline, the stock trades at 59.6× forward P/E (or $16.84 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
Stocks We Would Buy Instead of RXO
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