What a time it’s been for RXO. In the past six months alone, the company’s stock price has increased by a massive 98.5%, reaching $25.23 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in RXO, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think RXO Will Underperform?
We’re glad investors have benefited from the price increase, but we’re cautious about RXO. Here are three reasons you should be careful with RXO, plus one stock we’d rather own.
1. Demand Slips as Sales Volumes Slide
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Ground Transportation company because there’s a ceiling to what customers will pay.
Over the last two years, RXO’s units sold averaged 2.2% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests RXO might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
2. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
Unfortunately, RXO’s ROIC has decreased over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
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 $13 million of cash over the last year, and its $699 million of debt exceeds the $21 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 cheer for all companies making their customers lives easier, but in the case of RXO, we’ll be cheering from the sidelines. Following the recent rally, the stock trades at 186.9× forward P/E (or $25.23 per share). This multiple tells us a lot of good news is priced in - you can find more timely opportunities elsewhere. We’d recommend looking at one of our all-time favorite software stocks.
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