XPO’s stock price has taken a beating over the past six months, shedding 27.8% of its value and falling to $112.06 per share. This might have investors contemplating their next move.
Is there a buying opportunity in XPO, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think XPO Will Underperform?
Even though the stock has become cheaper, we don't have much confidence in XPO. Here are three reasons why XPO doesn't excite us and a stock we'd rather own.
1. Revenue Spiraling Downwards
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. XPO’s demand was weak over the last five years as its sales fell at a 10.7% annual rate. This wasn’t a great result and is a sign of poor business quality. 
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for XPO, its EPS and revenue declined by 2.7% and 10.7% annually over the last five years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, XPO’s low margin of safety could leave its stock price susceptible to large downswings.
3. Free Cash Flow Margin Dropping
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.
As you can see below, XPO’s margin dropped by 5.6 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the longer-term trend returns, it could signal it’s becoming a more capital-intensive business. XPO’s free cash flow margin for the trailing 12 months was 2.7%.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of XPO, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 27.6× forward P/E (or $112.06 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better investment opportunities out there. Let us point you toward our favorite semiconductor picks and shovels play.
Stocks We Like More Than XPO
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