Contract logistics company GXO (NYSE:GXO) reported Q3 CY2024 results topping the market’s revenue expectations, with sales up 27.8% year on year to $3.16 billion. On the other hand, next quarter’s revenue guidance of $2.56 billion was less impressive, coming in 19.3% below analysts’ estimates. Its non-GAAP profit of $0.79 per share was also 2.7% above analysts’ consensus estimates.
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GXO Logistics (GXO) Q3 CY2024 Highlights:
- Revenue: $3.16 billion vs analyst estimates of $3.00 billion (5.3% beat)
- Adjusted EPS: $0.79 vs analyst estimates of $0.77 (2.7% beat)
- EBITDA: $223 million vs analyst estimates of $223.5 million (small miss)
- Revenue Guidance for Q4 CY2024 is $2.56 billion at the midpoint, below analyst estimates of $3.17 billion
- Management reiterated its full-year Adjusted EPS guidance of $2.83 at the midpoint
- EBITDA guidance for the full year is $820 million at the midpoint, in line with analyst expectations
- Gross Margin (GAAP): 15.4%, down from 18.6% in the same quarter last year
- Operating Margin: 2.6%, down from 3.6% in the same quarter last year
- EBITDA Margin: 7.1%, down from 8.1% in the same quarter last year
- Free Cash Flow Margin: 3.3%, down from 7.7% in the same quarter last year
- Organic Revenue rose 2.6% year on year, in line with the same quarter last year
- Market Capitalization: $7.00 billion
Malcolm Wilson, chief executive officer of GXO, said, “We have increasing momentum in our business. In the third quarter, we delivered our highest-ever quarterly revenue of $3.2 billion, reflecting growth of 28% year over year, along with sequential improvement in organic revenue growth and strong free cash flow."
Company Overview
With notable customers such as Nike and Apple, GXO (NYSE:GXO) manages outsourced supply chains and warehousing for various companies.
Air Freight and Logistics
The growth of e-commerce and global trade continues to drive demand for expedited shipping services, presenting opportunities for air freight companies. The industry continues to invest in advanced technologies such as automated sorting systems and real-time tracking solutions to enhance operational efficiency. Despite the advantages of speed and global reach, air freight and logistics companies are still at the whim of economic cycles. Consumer spending, for example, can greatly impact the demand for these companies’ offerings while fuel costs can influence profit margins.
Sales Growth
Reviewing a company’s long-term performance can reveal insights into its business quality. Any business can have short-term success, but a top-tier one sustains growth for years. Over the last five years, GXO Logistics grew its sales at an excellent 13.3% compounded annual growth rate. This is a useful starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. GXO Logistics’s annualized revenue growth of 12.1% over the last two years is below its five-year trend, but we still think the results were good and suggest demand was strong. GXO Logistics recent history stands out, especially when considering many similar Air Freight and Logistics businesses faced declining sales because of cyclical headwinds.
This quarter, GXO Logistics reported robust year-on-year revenue growth of 27.8%, and its $3.16 billion of revenue topped Wall Street estimates by 5.3%. Management is currently guiding for a 1.3% year-on-year decline next quarter.
Looking further ahead, sell-side analysts expect revenue to grow 14.1% over the next 12 months, an improvement versus the last two years. This projection is admirable and shows the market believes its newer products and services will catalyze higher growth rates.
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Operating Margin
Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
GXO Logistics was profitable over the last five years but held back by its large cost base. Its average operating margin of 2.1% was weak for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.
On the plus side, GXO Logistics’s annual operating margin rose by 1.1 percentage points over the last five years, as its sales growth gave it operating leverage.
In Q3, GXO Logistics generated an operating profit margin of 2.6%, down 1.1 percentage points year on year. Since GXO Logistics’s gross margin decreased more than its operating margin, we can assume its recent inefficiencies were driven more by weaker leverage on its cost of sales rather than increased marketing, R&D, and administrative overhead expenses.
Earnings Per Share
We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth was profitable.
GXO Logistics’s EPS grew at an astounding 25.5% compounded annual growth rate over the last five years, higher than its 13.3% annualized revenue growth. This tells us the company became more profitable as it expanded.
Diving into the nuances of GXO Logistics’s earnings can give us a better understanding of its performance. As we mentioned earlier, GXO Logistics’s operating margin declined this quarter but expanded by 1.1 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.
Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.
For GXO Logistics, its two-year annual EPS declines of 4.5% mark a reversal from its (seemingly) healthy five-year trend. We hope GXO Logistics can return to earnings growth in the future.In Q3, GXO Logistics reported EPS at $0.79, up from $0.69 in the same quarter last year. This print beat analysts’ estimates by 2.7%. Over the next 12 months, Wall Street expects GXO Logistics’s full-year EPS of $2.50 to grow by 29.3%.
Key Takeaways from GXO Logistics’s Q3 Results
It was good to see GXO Logistics beat analysts’ EPS expectations this quarter. On the other hand, its organic revenue and revenue guidance for next quarter fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock remained flat at $59 immediately following the results.
Big picture, is GXO Logistics a buy here and now? What happened in the latest quarter matters, but not as much as longer-term business quality and valuation, when deciding whether to invest in this stock. We cover that in our actionable full research report which you can read here, it’s free.