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Why XPO Stock Surged This Week

Shares of less-than-truckload (LTL) transportation company XPO (NYSE: XPO) were among the winners after the company reported better-than-expected results in its fourth quarter. It topped estimates on the top and bottom lines, expanded its operating margin, and improved on key service metrics.

According to data from S&P Global Market Intelligence, the stock finished the week up 26.7% on the news.

An XPO truck on the highway.
Image source: XPO.

XPO revs up again

XPO is a much different company than it was just two years ago. Having spun off the GXO Logistics contract logistics arm and the RXO truck brokerage, the business is left with the North American LTL segment and a small European transportation business; the company plans to sell the European business.

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As it's pared down, XPO has also committed to improving operations through its LTL 2.0 strategy, and that helped it lower its damage claims ratio to 0.3%, down from 1.2% just two years ago. As a result of that and other improvements, the company was able to raise its yield, or price, by 10.3% excluding fuel, in North America, which led to an improvement in operating ratio of 380 basis points to 86.5%. (Operating ratio is the inverse of operating margin.) Adjusted operating income, meanwhile, jumped 51% to $160 million.

That seemed to be the primary reason why the stock soared on the news, but overall numbers were strong as well in a challenging environment for the transportation sector as both UPS and FedEx offered weak guidance in their recent earnings reports.

Revenue in Q4 rose 6% to $1.94 billion, edging past expectations of $1.92 billion, and adjusted earnings per share fell from $0.98 to $0.77 as the company lapped a $55 million gain on real estate, and had lower pension income and higher interest expense.

What's next for XPO

The transportation company said it expected its operating ratio to improve by 150 to 250 basis points this year as it works toward its 2027 goal of lowering it by 600 basis points to reach 81.5%.

XPO has stock has surged over the last year, up roughly 300% from its bottom in April. The company hired Dave Bates away from industry leader Old Dominion Freight Lines to be its new COO, benefited from the bankruptcy of Yellow, which was then the No. 3 LTL carrier, and has delivered strong earnings results in a tough macro environment.

If the company can keep making progress on its LTL 2.0, the stock should move higher, especially if the industrial economy starts to accelerate.

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Jeremy Bowman has positions in GXO Logistics, Rxo, and XPO. The Motley Fool has positions in and recommends FedEx and Old Dominion Freight Line. The Motley Fool recommends GXO Logistics, Rxo, United Parcel Service, and XPO. The Motley Fool has a disclosure policy.

Why XPO Stock Surged This Week was originally published by The Motley Fool