XPO, RXO financial targets assume no recession until 2027

XPO logistics long-term financial goals are provided for its light freight and brokerage divisions on Monday after the market closes. Production of its brokerage segment, RXO, is emerging scheduled for November 1. The remaining XPO entity will become a pure LTL provider after the European shipping division is spun off at a later date.

LTL revenue is projected to register a compound annual growth rate (CAGR) of 6% to 8% through 2027, starting at $4.1 billion in 2021. Adjusted earnings before interest, taxes, depreciation and amortization are expected to grow 11-13% annually.

Over the six-year period of XPO (NYSE: XPO) the adjusted operating ratio is expected to improve by at least 600 basis points. The LTL unit posted an 87.6% adjusted OR excluding real estate and retirement income last year. Adjusted OR also includes approximately $80 million in previously unallocated corporate costs that will be part of XPO’s operating expenses beginning in 2023.

Gross capital expenditures are expected to be between 8% and 12% of XPO’s annual revenue.

“In our view, the revenue and profit assumptions do not look very conservative,” said an analyst at Deutsche Bank (NYSE: DB) said Amit Merotra in an evening note to clients on Monday. “For example, we note that XPO’s 7% CAGR for LTL revenue through 2027 compares to 10% and 11% CAGR growth in ODFL and SAIA over the past 6 years … which included a period of unprecedented industry volume expansion, significant increasing market share (ODFL) and network expansion from regional to national network (SAIA).”

RXO targets adjusted EBITDA of $475 million to $525 million by 2027.

RXO reported adjusted EBITDA of $302 million for the 12 months ended June 30. This figure included previously unallocated corporate expenses and expected expenses related to the standalone public company, among other things.

From 2023 to 2027, RXO’s capital expenditure plus depreciation will be 1% as a percentage of revenue. Annual interest expense is expected to be $37 million over the same period.

XPO also provided preliminary results for the third quarter of 2022.

Consolidated revenue of $3.04 billion was below the consensus estimate of $3.1 billion at press time. However, adjusted EBITDA is expected to be in the range of $348 million to $352 million, beating the company’s guidance of $330 million to $345 million (excluding gains on property sales).

The operating ratio in the LTL segment is expected to be 85.1%, 82.9% or higher on an adjusted basis. The result will be at least 150 bps better than last year.

XPO confirmed that it expects at least $1 billion in LTL adjusted EBITDA for the full year of 2022, which includes $50 million from an expected gain on property sales in the fourth quarter. However, it lowered OR expectations for the year. In 2022, the annual adjusted LTL OR is expected to improve only between 50 and 100 bps.

During the quarter, LTL revenue per quintal increased by 7% y/y excluding fuel charges. Tonnage fell 2.9% y/y over the period, but improved month-on-month during the quarter, turning positive in September.

Separate indicators were also presented for the brokerage segment. Revenue was down 2% y/y, while volumes were up 9% y/y. Dollar margin, or revenue less transportation and service costs, rose 31% y/y.

XPO’s trailing 12-month adjusted EBITDA is expected to double net debt at the end of the year following the business separation.

XPO will release full third-quarter results on October 31.

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