GXO Logistics, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

GXO Logistics is a large-scale contract logistics provider, offering warehousing and transportation services to various industries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

GXO Logistics, Inc. is the world’s largest pure-play contract logistics provider. GXO operates in a highly competitive global logistics market. Key aspects of their business include:

  • Revenue Distribution: GXO’s revenue streams are spread across various sectors, including consumer, retail, e-commerce, industrial, and food & beverage. These diverse sectors create some stability in revenues, since they can counteract downturns in a single sector. While they have a global presence, the majority of the business (around two-thirds) comes from North America and Europe, with the rest from the Asia-Pacific and Latin America, with the highest growth rates in the latter.
  • Trends in the Industry: The logistics industry is undergoing significant transformation due to increased e-commerce, automation, and the demand for faster and more complex supply chains. The trend of reshoring of logistics processes and warehouses into US and Europe continues with this trend acting as a tailwind for GXO. Customers are increasingly looking for partners that provide visibility into supply chain operations and have a strong ESG (Environmental, Social, and Governance) agenda.
  • Margins: In the latest earnings results for Q1 2024, operating margins have declined, with gross margin falling from 16.6% to 15.1%, and profit margin decreasing from 1.9% to 0.9%. This is driven by a mix of macro issues, including reduced pricing leverage, and increased labor and operating costs.
  • Competitive Landscape: The logistics sector is intensely competitive, with numerous global and local players. GXO competes with other large logistics companies (such as DHL or Kuehne+Nagel), regional and local players, and technology providers that offer niche products. This intense competition puts pressure on margins. The major points of competition include service quality, speed, technology offerings, and prices. The barrier to entry is pretty low in some segments, but the ability to scale and form a strong network is still important to keep a leading position.
  • What Makes GXO Different?: GXO differentiates itself with its focus on supply chain technology and automation. The company has invested in artificial intelligence, automation systems, and advanced data analytics to enhance its service offerings and improve productivity, which provides its customers with cost and time efficiency. GXO utilizes data-driven processes to optimize efficiency and flexibility in its clients’ supply chains. In recent times, GXO has expanded its offerings in ecommerce, reverse logistics and cold chain.

Financial Analysis

  • Revenue Growth: GXO has seen considerable growth over the past few years, driven by acquisitions, e-commerce expansion, and customer demand for customized solutions, however, Q1 2024 results indicate declining top line growth. Revenue in Q1 2024 has decreased by 1% year-over-year, whereas revenue growth for 2023 has been 6% year-over-year. Revenue from supply chain solutions make up around 99% of revenue, while transportation makes up only 1%.
  • Profitability: There’s been a decrease in profitability in Q1 2024. The company’s adjusted EBITDA margins have decreased to 5.2% compared with 6.6% YoY, and the EBIT margin decreased from 3.8% YoY to 2.6%. This is partially due to a combination of factors including higher restructuring costs associated with the Clipper acquisition. However, from 2021-2023 there have been year-over-year increases in gross profits, from 17.6% to 19.0%.
  • Liquidity and Capital: GXO maintains a solid liquidity position. As of Q1 2024 they have a total of $475 million in cash and cash equivalents. GXO has long term debt of $4072 million, and a total debt of $4166 million with a net debt of approximately $3.9 billion. GXO also relies on credit facilities which have been established with lenders.
  • Recent Acquisitions: GXO has a history of acquiring many smaller players in the industry. Their recent acquisition of Clipper has generated cost synergies and added to the service offerings.
  • Invested Capital and ROIC: ROIC has fallen from 15.2% in 2021 to 12.4% in 2022, and 8.1% in 2023. This indicates a lower profitability and weaker efficiency in the business, indicating a potential vulnerability in GXO’s moat.

GXO’s recent performance has been lackluster, with both revenue and profitability trending down and ROIC significantly diminished. GXO has a fairly leveraged balance sheet with high debt, which is not necessarily bad since the nature of the business implies a relatively stable earnings stream but in times of higher interest rates becomes a liability and may cause difficulties in the company’s capital structure if revenues and margins are diminished.

Moat Rating: 2 / 5

GXO has a narrow economic moat. While its scale, tech and data capabilities, and global operations give it a competitive advantage, these are not incredibly durable or difficult to replicate. It might need more time for these competitive advantages to truly turn into a wide moat. Here’s a breakdown of its moat:

  • Scale: GXO’s large network of warehouses and transportation creates scale advantage over smaller competitors. This scale is essential to serving large clients that have a national or global footprint. However, these assets are typically not hard to replicate over time, and many competitors can also grow to achieve better scale, or use a competitor’s network by outsourcing their transportation and warehouses.
  • Tech & Data: GXO’s focus on supply chain technology is a competitive advantage that offers value to their clients, but software providers are easily able to sell similar technologies.
  • Switching costs: While GXO develops relationships with its customers and builds operational integrations with them, it does not lock-in customers via very strong switching costs. While certain aspects of GXO’s services may create sticky customer relationships, they are usually not prohibitive enough to create a durable moat, and customers will switch if a competitor offers a significant price advantage.
  • Brand: GXO operates a business to business business, and therefore does not have any high brand recognition.

Understandability Rating: 3 / 5

GXO’s business model is moderately complex to grasp. While its core service offerings - warehousing, transportation and supply chain technology - are relatively simple, the integration of these into a cohesive, value-generating package can be difficult to understand. There is also some intricacy to its reporting (due to acquisitions and subsidiaries) and its financial statements. For an average investor, there are some caveats to fully understanding the business model and the drivers behind value creation.

Balance Sheet Health Rating: 4 / 5

GXO’s balance sheet is overall healthy. However, the debt level should be watched closely given the high rate of interest rate environment. While the current ratio of 1.57 and quick ratio of 1.25 (as of Q1 2024) are reasonable, there is a need to take note of high short-term debt in contrast to long-term debt. However, GXO’s revenue stream is relatively stable and recurring, which will help in comfortably paying off debt.

Legitimate Risks

  • Technological Disruption: While GXO is heavily investing in technological offerings, rapid technological change could disrupt GXO’s competitive positioning. Changes in automation, AI, and other supply chain software can reduce barriers to entry, and competitors with more advanced technologies may emerge.
  • Macroeconomic Downturn: GXO’s operations are vulnerable to economic downturns. Recessions and downturns can lead to reduced demand for their services, impacting the company’s financial performance.
  • Intense Competition: The logistics sector is intensely competitive. Price wars, capacity over expansions, and other competitive practices will pressure margins and hurt overall performance. Competitors may adopt similar technologies or strategies, eroding GXO’s competitive edge.
  • Customer Concentration: Although GXO has diverse revenues across many sectors, a high dependence on specific large clients could expose the company to risk if those clients decide to reduce volumes or switch to competitors.
  • Acquisition Integration Risk: GXO has a history of aggressive acquisitions of other smaller companies, there exists a risk that GXO’s performance may be hampered due to issues integrating the various businesses, or overpaying for them.
  • Financial Leverage: GXO operates with significant financial leverage, with a high debt load, making it very sensitive to interest rate fluctuations.