The transportation and trucking industry isn’t getting a lot of attention from investors these days. That’s not surprising.
There’s an artificial intelligence (AI) boom going on in the tech sector, and the industrial economy has been sluggish, as we saw from results at shipping powerhouses like UPS and FedEx, both of which offered weak guidance in their recent earnings reports due primarily to factors outside of their control.
However, those headwinds didn’t stop XPO (XPO -2.66%) from delivering a blockbuster earnings report last Wednesday as shares of the less-than-truckload (LTL) shipping provider jumped 18.9% as its fourth-quarter results blew past expectations. Let’s take a closer look.
XPO’s transformation strategy pays off
On the top line, XPO reported 6% revenue growth to $1.94 billion, ahead of estimates at $1.92 billion.
Its North American segment was particularly strong as revenue improved 9% to $1.19 billion. Yield, or pricing, was up 10.3%, excluding fuel; shipments were up 5.7%, and tonnage increased 2%.
In an interview, XPO’s chief strategy officer explained that the company had made a number of improvements as part of its LTL 2.0 transformation strategy to allow it to pass along higher prices.
Those include reducing its damage ratio to an all-time low of 0.3%, down from 1.2%, where it was two years ago. The company accomplished that by changing its compensation to incentivize for service quality.
It has also added technology to track the way individual dockworkers load trailers so it can work with underperformers to improve, and it has added a type of airbag system between pallets to better cushion and protect its freight.
The higher yield paid off on the bottom line as well as an operating ratio in North America (the inverse of operating margin) that improved by 380 basis points to 86.5%. Adjusted operating income in North America improved from $106 million to $160 million.
Revenue growth was slower in its European business, which the company plans to eventually divest, increasing 2% to $753 million.
Overall, adjusted earnings per share came in at $0.77, which was down from $0.98, though the slide was mostly due to one-time events like $55 million of real estate gains in 2022, as well as lower pension income and higher interest expense in 2023. But that result still easily beat estimates at $0.62.
The rally following the report capped off a dramatic run for XPO — the stock has now quadrupled since its low last April. The trucking company has achieved that growth by improving customer satisfaction by doing things like lowering its damage-claims ratios and adding new terminals, drivers, and trailers.
It also benefited from the bankruptcy of competitor Yellow, which freed up market share and allowed it to buy 28 of its service centers when they were auctioned off in bankruptcy. Those service centers should be converted by the end of the year and are expected to drive profits higher starting this year.
Why XPO stock can keep moving higher
XPO stock might seem to be ready for a breather after gaining roughly 300% since April, but it can keep climbing this year. It gained market share in the quarter, and the company is well positioned to grow yield and improve operating ratio as it’s targeting an improvement of 150 to 250 basis points in its operating ratio this year.
According to 2027 targets outlined in October 2022, management is aiming to cut its operating ratio by even more in the long run, from 87.6% to 81.6%. That’s a good thing, as a lower operating ratio is better as it indicates lower costs.
If interest rates fall later this year, and transportation demand picks up, XPO stock could surge again. Even if it doesn’t get help from macroeconomic factors, it’s clear that the company is doing what it takes to raise prices and expand margins, which should pay off on the bottom line.
There’s still a lot of room to run for XPO.
Jeremy Bowman has positions in XPO. The Motley Fool has positions in and recommends FedEx. The Motley Fool recommends United Parcel Service and XPO. The Motley Fool has a disclosure policy.