Nearly three years ago, GXO Logistics (GXO -4.92%) was spun off from XPO, the transportation and logistics company that had been one of the best-performing stocks of the previous decade.
The logic for the move was straightforward. XPO had become too complex to be valued appropriately, and then-CEO Brad Jacobs argued that the stock was undervalued due to a conglomerate discount.
Spinning off GXO would allow each company to allocate capital, pay employees, and make acquisitions that were in keeping with its strategic goals, and be rewarded by the stock market accordingly. It also formed GXO as the world's largest pure-play contract logistics company, allowing it to pursue acquisitions and consolidate its leadership in a large and fragmented industry.
GXO's results have been mixed as the stock essentially trades at its opening price from when the spin-off took place, but the business has made significant strides since then, validating the spin-off. As you can see from the chart below, both revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) have risen solidly since then.
The rationale for the spin-off was on display once again in GXO's latest earnings report as the company touted the benefits of its recent acquisition of Wincanton along with its recent results. Let's take a look at that deal and other reasons why now looks like a good opportunity to buy GXO stock.
The Wincanton deal
GXO closed its acquisition of Wincanton at the end of April, buying the U.K.-based logistics company for approximately $1 billion.
Wincanton will give GXO a significant presence in the industrial and aerospace verticals, as well as a sizable business that will bring $1.8 billion in revenue, 180 locations, and 20,000 employees under GXO's umbrella.
GXO has a strong presence in aerospace and defense in the U.S., and gaining Wincanton's assets and customer base in the U.K. will give GXO an opportunity to leverage its expertise and expand into industrial verticals across Europe.
The deal is expected to achieve $60 million in annual run-rate synergies and is further evidence that the company is moving full speed ahead with its acquisition strategy.
GXO also just announced a 700,000-square-foot high-tech facility in Germany in a 20-year contract with Levi Strauss. This helps it leverage its earlier acquisition of Clipper Logistics, which gave it a foothold in Germany, allowing it to expand in a valuable market.
According to Chief Revenue Officer Richard Cawston, speaking in an interview with The Motley Fool, Germany now represents the company's fourth-largest and fastest-growing pipeline, showing how the company has capitalized on the Clipper deal to make Germany a major market.
The sales cycle is accelerating
The last couple of years have been challenging ones for logistics companies like GXO as e-commerce growth slowed significantly after the pandemic and consumer spending shifted to services like travel and entertainment. Meanwhile, the industrial economy has been hampered by global inflation and weak end-consumer demand.
However, those headwinds may be starting to fade. Cawston said the company saw the velocity of its sales pipeline increase, a sign that customers are getting more aggressive and confident about investing in their supply chain needs.
GXO's new business wins jumped 55% in the first quarter to $250 million, and its sales pipeline reached a 12-month high of $2.2 billion, showing robust demand growth. If that momentum continues, the bottom line will clearly benefit.
2027 goals are within reach
When GXO was formed in 2021, the company issued a bold set of financial targets for 2027, and it reaffirmed those numbers in its recent earnings report. The company expects to reach $15.5 billion to $16 billion in revenue, representing a compound annual growth rate (CAGR) in organic revenue of 10%.
On the bottom line, it forecast a 15% CAGR over the next three years in adjusted EBITDA to $1.25 billion-$1.3 billion, and it expects a CAGR of better than 15% in adjusted earnings per share (EPS).
GXO currently has a market cap of $6 billion, which is less than 5 times that EBITDA target. Its adjusted EPS target calls for that figure to approach $5 by 2027.
GXO is the independent leader in an addressable market valued at $450 billion where automation is transforming the industry and convincing businesses like Levi Strauss to outsource their logistics to an expert like GXO.
If the company hits those 2027 targets, GXO stock looks like a good bet to double in the next three years, considering its current valuation.
