XPO Earnings: Less-Than-Truckload-Industry Demand Pressured, but Firm Grabbing Shipments From Yellow

XPO’s XPO second-quarter organic top line fell 6% year over year, excluding the November truck brokerage segment (RXO) divestiture. Revenue was mostly in line with our expectations. XPO’s flagship less-than-truckload top line was down 8%, driven by lower fuel surcharges and the freight market pullback. European trucking segment revenue declined 3% on softer underlying demand, likely partly offset by new contract wins and lingering pricing strength.

Relative to second-quarter 2022, LTL tonnage fell 3%, while total-yield flipped negative year over year (down 6%) on falling fuel surcharges, as core pricing remains positive. In short, LTL carriers are still grappling with retailer destocking and sluggish U.S. industrial end markets, though these factors are not a surprise, and we’ve been baking in a correction this year.

On the other hand, XPO’s shipments have seen a meaningful uptick over the past few weeks, driven by freight diversions from floundering LTL peer Yellow—a similar trend we heard from peers Saia and Old Dominion. The magnitude of LTL business that XPO will accept remains uncertain, but we suspect it will gain a material amount of shipments that fit its acceptable yield profile, as it appears Yellow recently stopped moving customers’ freight. For perspective, XPO’s July tonnage-per-day increased 4% year over year—a quick reversal from the 4% decline seen in June.

Because of significant Yellow-related freight opportunities, we recently raised our medium-term revenue growth forecasts and boosted our fair value estimate about 10%. Following second-quarter results, we expect to raise our $44 fair value slightly (less than 5%) as we give XPO slightly more credit for LTL operating ratio gains from greater lane density in the years ahead. The shares still look rich relative to our longer-term free cash flow growth assumptions—a common theme for peers Old Dominion and Saia as well.