XPO has been on fire lately. In the past six months alone, the company’s stock price has rocketed 42.7%, reaching $187.44 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in XPO, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is XPO Not Exciting?
We’re glad investors have benefited from the price increase, but we're sitting this one out for now. Here are three reasons why XPO doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, XPO’s 5.7% annualized revenue growth over the last five years was tepid. This fell short of our benchmark for the industrials sector.
2. Low Gross Margin Reveals Weak Structural Profitability
At StockStory, we prefer high gross margin businesses because they indicate the company has pricing power or differentiated products, giving it a chance to generate higher operating profits.
XPO has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 17.3% gross margin over the last five years. Said differently, XPO had to pay a chunky $82.68 to its suppliers for every $100 in revenue. 
3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
XPO has shown poor cash profitability relative to peers over the last five years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 1.8%, below what we’d expect for an industrials business.
Final Judgment
XPO’s business quality ultimately falls short of our standards. After the recent surge, the stock trades at 42.7× forward P/E (or $187.44 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at our favorite semiconductor picks and shovels play.
Stocks We Like More Than XPO
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