2023-06-20 18:07:12 ET
Summary
- Today, we circle back on GXO Logistics, Inc., whose stock is up some over 40% in 2023, year to date.
- The company is executing well, continues to automate operations, and has booked several major contract wins in 2023.
- That said, the stock seems more than fairly valued on an earnings and a free cash flow valuation. Can the rally continue or is it time to book profits?
- An updated investment analysis on GXO Logistics follows in the paragraphs below.
Experience is not what happens to a man; it is what a man does with what happens to him. ”? Aldous Huxley.
We posted our first article on GXO Logistics, Inc. ( GXO ) at the very beginning of 2023. We concluded that piece about this growing logistics concern in the following way:
Factoring in long-term contracts that include inflation pass-throughs and minimum volume guarantees, it would appear that the Street’s bottom-line estimate of $2.45 for FY23 is low. With the Fed likely to pump the brakes on rate hikes, perceptions regarding the macro backdrop should begin to improve, further raising GXO’s appeal. The company is not “compellingly cheap,” but it seems a solid covered call candidate. "
While that trade has turned out to be nicely profitable, we left some money on the table, as the stock is up some 40% since our initial analysis on GXO Logistics. The company has expanded its operations in Europe in recent months and also posted first quarter results. Is a covered call trade on GXO still a good bet? An updated analysis follows below.
Company Overview:
GXO Logistics, Inc. is located in Greenwich, CT. The company provides warehousing and distribution, order fulfilment, e-commerce, reverse logistics, and other supply chain services both here in the United States as well as overseas. The company expanded its capabilities in France at the end of last month and earlier the month began the process of expanding its operations in Germany. This will include opening a 387,000 square foot warehouse in Dormagen, a key logistical hub in the country.
May Company Presentation
The company operations on an " asset-light" business model and is investing heavily in automation. GXO's operations utilizing automation or adaptive technology make up nearly 40% of its revenue and is quickly becoming a bigger and bigger part of overall sales. The stock currently trades around $61.00 a share and sports an approximate market capitalization of just south of $7.3 billion.
First Quarter Results:
May Company Presentation
On May 9th, the company posted non-GAAP earnings per share of 49 cents a share for the first quarter, six cents a share above expectations. Leadership highlighted several key contract wins in the quarter. These included a deal with Sainsbury’s, a large grocery retailer in the UK. The deal represents nearly $1 billion in lifetime value and is the largest annual revenue contract awarded in the company's history. Revenues rose 12% on a year-over-year basis to $2.3 billion, in line with the consensus.
May Company Presentation
Management bumped forward guidance up a bit for the rest of FY2023. It now expects Adjusted EBITDA for the fiscal year to be in the $715 million to $740 million range, a $15 million rise from previous guidance. It also raised its non-GAAP earnings guidance by 10 cents a share to a range of $2.40 to $2.60. The company is forecasting organic sales growth of six to eight percent in FY2023 and projects roughly 30% of Adjusted EBITDA will be converted into free cash flow this fiscal year.
May Company Presentation
Analyst Commentary & Balance Sheet:
Since first quarter results posted, nine analyst firms including JP Morgan and Oppenheimer have reiterated Buy/Outperform ratings on GXO. Price targets range from $54 to $70 a share. Barclays maintained its Hold rating on $55 price target on the stock.
A company director sold just over $110,000 worth of shares in mid-January. That has been the only insider activity so far in 2023. Just over five percent of the outstanding float is currently held short. The company ended the first quarter of 2023 with approximately $425 million of cash and marketable securities against just under $1.8 million. The company produced $39 million worth of free cash flow in the quarter and pare down its debt by some $25 million as well. The company's net leverage is roughly 1.9X.
May Company Presentation
Verdict:
The current analyst firm consensus has GXO Logistics, Inc. making $2.51 a share in FY2023 on revenue growth in the high single digits to $9.84 billion. They expect similar revenue growth in FY2024 and project the company will make three bucks a share.
The company has executed well here in 2023 on many fronts despite a challenging economic environment. That said, it is hard to see much value in the equity at over sixty bucks a share. The stock is up near, and in some cases, over price targets of analyst firms that have Buy ratings on it.
GXO Logistics, Inc. shares go for approximately 24 times forward earnings and have no dividend. Quite pricey for a company growing sales under 10% annually. In addition, if you take the upper end of management's FY2023 adjusted EBITDA guidance of $740 million and incorporate the 30% figure given for the conversion of that metric to free cash flow, you get just over a $220 million projection for free cash flow in FY2023. That amounts to a free cash flow yield of three percent. Hardly compelling when a one-year treasury bill yields over 5.2% at the moment. Therefore, it would seem the right time to book profits on any investment one might have on GXO Logistics, Inc. I will be doing the same when my covered call positions in GXO expire in the money next month.
One learns from books and example only that certain things can be done. Actual learning requires that you do those things .”? Frank Herbert.
For further details see:
GXO Logistics: Booking Profits