RXO became a publicly traded company Nov. 1 after its spinoff from XPO Logistics, and Wall Street will be getting ready for its first earnings report and possible conference call as a stand-alone company, even as more data about the company emerges.
Jefferies & Co. this week released a report that initiated coverage of RXO at a “buy” rating, with a price target of $25 a share. RXO (NYSE: RXO) closed Wednesday at $18.12.
And while the stand-alone brokerage has yet to complete a quarter as its own company with a subsequent earnings release, it did file a 10-Q report with the Securities and Exchange Commission last week that showed its profitability within XPO had slipped in the third quarter compared to the prior year.
For the quarter ended Sept. 30 when it was part of XPO (NYSE: XPO), what is now stand-alone RXO recorded revenue of $1.14 billion, down from $1.2 billion in the third quarter of 2021.
At the same time, it had several cost lines that were up for the quarter. While the largest component of its costs — purchased transportation — declined to $857 million from $958 million, its sales, general and administrative costs rose to $158 million from $130 million, while direct operating expense net of depreciation and amortization rose to $56 million from $48 million.
It resulted in RXO recording net income of $13 million compared to $33 million from Q3 2021.
But looking forward is what Jefferies (NYSE: JEF) did in its report, which was overwhelmingly bullish, not just on RXO but also the brokerage sector in general.
“We are positive on the brokerage industry in general given the asset-light nature is more favorable in a weaker macro backdrop and secular tailwinds are driving increased broker penetration of the truckload market (from 7% in 2000 to 28% by 2026),” the report said. “Even in a weaker macro/demand environment, carriers are willing to use brokers to find shippers and minimize their empty miles, enabling brokers to maintain a relatively consistent margin across cycles.”
And even though nobody even owned a share of RXO stock before Nov. 1, Jefferies is already projecting a share repurchase program.
In presentations to investors in October, RXO management released numerous details about the company’s finances. One was that RXO had generated free cash flow of $125 million for the 12 months ended June 30.
“Given the high FCF generation, we would expect the company to announce a share repurchase program over the next 12-18 months,” the Jefferies report said.
It cited data that in many cases was drawn from that investors release. It noted that RXO “carries a best in class margin profile with its EBITDA margin about 400 bps above its peers.”
“We believe RXO has a first mover advantage in technology which allows it to capture volume and revenue at a lower cost-to-serve with fewer touches,” the Jefferies report said. “It has been able to automate processes and improve productivity per head, driving efficiency and margin expansion, which we expect to continue going forward, particularly as it scales.”
In that investors presentation, RXO was listed as the fourth-largest broker by revenue after C.H. Robinson (NASDAQ: CHRW), TQL Logistics and Coyote Logistics. Revenue at RXO was listed as $2.7 billion in 2021, with $11.4 billion for C.H. Robinson, $7.3 billion for TQL and $2.9 billion for Coyote. J.B. Hunt’s (NASDAQ: JBHT) brokerage operation was right behind at $2.4 billion.
But RXO’s stock is cheap now, according to Jefferies, saying it is trading at 10X the brokerage house’s 2023 estimate of RXO EBITDA. That’s a 3X discount to CHRW and its peers, which also include Landstar (NASDAQ: LSTR). “We believe RXO should trade at least in-line, if not at a premium to its peers given RXO is growing faster, has better margins and produces higher EBITDA per employee,” Jefferies said.
The $25 target price is the base case. That base case assumes a revenue decline in 2023 to about $4.4 billion for the year, down from $4.9 billion for 2022. (For the nine months of 2022, the RXO 10-Q reported revenue of $3.67 billion, which puts it on track for $4.9 billion.)
The upside case for the stock coming in more than $25 involves a revenue decline that is “not as bad as feared as freight rates find a bottom and the U.S. consumer is resilient.” It also would require the company’s profitability “to expand as RXO flexes down its variable cost structure in a downturn.”
The downside scenario to $14 involves pretty much the opposite: a steeper revenue decline than forecast and a squeeze on profitability as “cost inflation offsets any cost cuts.”
Between the data in the RXO investor presentation and research done by Jefferies, some details of its digital brokerage platform have been amplified. The RXO brokerage app has been downloaded more than 800,000 times, according to Jefferies. That is behind Uber Freight (NYSE: UBER) at more than 1 million but more than C.H. Robinson and J.B Hunt at more than 600,000 each. Convoy’s app has been downloaded more than 400,000 times.
RXO has about 100,000 carriers on its platform, roughly equal to Convoy and more than C.H. Robinson, which is about 85,000, according to Jefferies. J.B. Hunt comes in at more than 150,000; Uber Freight has more than 100,000.
Jefferies said retention of carriers on the RXO platform has been strong because of three factors: the volumes of freight that RXO engages with; ease of use of the platform; and its loyalty program. “Members of the RXO platform get discounts on fuel, maintenance and trucks, ultimately creating a loyal base,” the Jefferies report said.
And the three work together to create a “flywheel effect as more carriers on the platform is attractive to shippers as this creates a larger marketplace and more shippers draws in more carriers.”
As a recession that Jefferies is predicting takes hold in 2023, the company said RXO has the ability to “quickly shift its portfolio mix toward contract as spot rates have fallen materially.” The report also said RXO’s third-quarter mix was 73% contract and 27% spot, versus a mix of 66%-34% a year ago.
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