News

Shareholders of RXO would probably like to forget the past six months even happened. The stock dropped 28.1% and now trades at $20.27. This might have investors contemplating their next move.

Is now the time to buy RXO, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free .

Even though the stock has become cheaper, we're swiping left on RXO for now. Here are three reasons why RXO doesn't excite us and a stock we'd rather own.

Why Do We Think RXO Will Underperform?

With access to millions of trucks, RXO (NYSE:RXO) offers full-truckload, less-than-truckload, and last-mile deliveries.

1. Revenue Tumbling Downwards

Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. RXO’s recent history marks a sharp pivot from its four-year trend as its revenue has shown annualized declines of 2.6% over the last two years. RXO isn’t alone in its struggles as the Ground Transportation industry experienced a cyclical downturn, with many similar businesses observing lower sales at this time.

2. EPS Trending Down

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Sadly for RXO, its EPS declined by 27.6% annually over the last four years while its revenue grew by 7.9%. This tells us the company became less profitable on a per-share basis as it expanded.

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 $57 million of cash over the last year, and its $656 million of debt exceeds the $35 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

RXO doesn’t pass our quality test. After the recent drawdown, the stock trades at 48.5× forward price-to-earnings (or $20.27 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 the AmazonandPayPal of Latin America .