XPO’s Overvaluation and Challenging Outlook Lead to Sell Rating Despite Strong European Performance

In a report released yesterday, Ravi Shanker from Morgan Stanley maintained a Sell rating on XPO, with a price target of $84.00.

Ravi Shanker has given his Sell rating due to a combination of factors impacting XPO’s performance and outlook. Despite XPO’s second-quarter results showing a strong EBIT performance, this was primarily driven by European operations, while the U.S. less-than-truckload (LTL) segment fell short of expectations in both revenue and EBIT. The management highlighted improvements in labor productivity and cost efficiencies, as well as benefits from AI and technology, but these were overshadowed by a challenging market cycle, with declines in tonnage and shipments.
Shanker’s rating also considers the company’s future prospects, which appear less optimistic. Although management is executing well and Europe shows potential for growth, the overall expectations for XPO seem overly ambitious. The company’s guidance for operating ratio improvement has been reduced, and with a lower baseline for 2025, achieving consensus figures in the coming years appears difficult. Additionally, XPO is currently valued higher than its peers, suggesting a need for moderation in its valuation. While internal initiatives are promising, Shanker sees better risk-reward opportunities with other companies in the sector.