Amazon (AMZN +0.53%) set off a panic in the supply chain industry on Monday when it announced its new supply chain services business.
Essentially, the company is opening up its logistics infrastructure, which powers its e-commerce business, to outside companies for the first time, with launch partners including Procter & Gamble and American Eagle Outfitters.
Logistics stocks plunged on the announcement on Monday, and one of the hardest-hit companies was GXO Logistics (GXO +0.12%), which is the world’s largest pure-play contract logistics company. GXO stock fell 18% on the news, a sign that investors believe Amazon represents a significant threat to the company.
The company reported first-quarter earnings on Wednesday, giving management an opportunity to push back on that narrative. GXO CEO Patrick Kelleher spoke to The Motley Fool about Amazon’s entry into the market and the company’s results.
Image source: GXO Logistics.
What Amazon’s entry into logistics means for GXO
While GXO investors are clearly spooked by Amazon’s entry into the industry, Kelleher doesn’t see it that way. In fact, he dismissed the threat, essentially calling Amazon a non-factor for GXO.
Kelleher explained that GXO operates highly customized warehouses for its customers, providing “bespoke solutions” that include automation and advanced technologies, like AI. Amazon, on the other hand, is inviting outside customers to use its pre-existing infrastructure for their logistics needs, which is meeting a much different value proposition than GXO is.
Regarding the stock sell-off on Monday, Kelleher saw that as a combination of a knee-jerk reaction from investors, which we have seen before when Amazon enters a new market, and a misunderstanding of GXO’s business, which is focused on specialized solutions. Kelleher acknowledged that Amazon could have an impact on air freight transportation, which is capacity-constrained, as adding new air capacity could lower prices. However, he said the contract logistics industry wasn’t facing a problem of finite capacity, but meeting customer needs, which GXO is well-equipped to do.
Finally, he also noted that the contract logistics industry is large enough, with a market size of $500 billion, that there is plenty of room in the market for a new entrant. In other words, Amazon’s (or another company’s) entry isn’t going to cause a disruption.
What we learned from GXO’s first quarter
Under new CEO Kelleher, GXO has been focused on organic growth, stepping back from its earlier strategy of growing through M&A, and executing in key verticals like aerospace and defense, and life sciences. Kelleher also sees a significant opportunity for organic growth in North America.
In the first quarter, GXO’s revenue reached $3.3 billion, up 10.8% or 4.1% on an organic basis, edging out expectations at $3.22 billion. The company’s acquisition of Wincanton explains the difference between the organic and nominal growth rates.
On the bottom line, its adjusted earnings per share rose from $0.29 to $0.50, and it delivered strong results in key verticals like aerospace and defense, technology, and life sciences. In its strategic verticals, the pipeline for new business grew 35%, which Kelleher attributed to bringing on experts through an advisory board and getting the right people in place, including completing his management team with the naming of CFO Mark Suchinski.
Looking ahead to the rest of the year, GXO modestly hiked its full-year guidance for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and earnings per share. It now sees adjusted EBITDA of $935 million-$975 million, up from a previous range of $930 million-$970 million, and adjusted EPS of $2.90-$3.20, compared to a previous range of $2.85-$3.15.
It continues to expect organic growth of 4%-5% for the year.
Today’s Change
(0.12%) $0.06
Current Price
$49.91
Key Data Points
Market Cap
$5.7B
Day’s Range
$48.92 – $51.95
52wk Range
$37.97 – $66.85
Volume
3.1M
Avg Vol
1.4M
Gross Margin
11.62%
Is GXO a buy?
Kelleher believes the company can grow significantly faster than its current growth rate, noting that the industry compound annual growth rate (CAGR) is forecast to grow at 6%-8%, and he believes GXO can beat that.
The logistics company appears to be showing early results in its priority verticals, and the guidance hike is a good sign as well. The company is planning to host an Investor Day conference in the third quarter to outline its growth targets over the next three years.
While the stock has been disappointing in recent years, the Amazon sell-off appears to offer a buying opportunity, according to Kelleher’s explanation. If he can accelerate the company’s growth as he intends to, the stock will respond favorably.
