What a brutal six months it’s been for RXO. The stock has dropped 27.9% and now trades at $15.55, rattling many shareholders. This may have investors wondering how to approach the situation.
Is now the time to buy RXO, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is RXO Not Exciting?
Despite the more favorable entry price, we're swiping left on RXO for now. Here are three reasons why there are better opportunities than RXO and a stock we'd rather own.
1. Shrinking Operating Margin
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.
Looking at the trend in its profitability, RXO’s operating margin decreased by 5.4 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. We’ve noticed many Ground Transportation companies also saw their margins fall (along with revenue, as mentioned above) because the cycle turned in the wrong direction, but RXO’s performance was poor no matter how you look at it. It shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 1.2%.
2. EPS Took a Dip Over the Last Two Years
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Sadly for RXO, its EPS declined by 61.7% annually over the last two years while its revenue grew by 14.6%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
RXO’s five-year average ROIC was negative 0.5%, meaning management lost money while trying to expand the business. Its returns were among the worst in the industrials sector.
Final Judgment
RXO isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 57.6× forward P/E (or $15.55 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at a top digital advertising platform riding the creator economy.
Stocks We Would Buy Instead of RXO
Donald Trump’s April 2025 "Liberation Day" tariffs sent markets into a tailspin, but stocks have since rebounded strongly, proving that knee-jerk reactions often create the best buying opportunities.
The smart money is already positioning for the next leg up. Don’t miss out on the recovery - check out our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 183% over the last five years (as of March 31st 2025).
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-micro-cap company Kadant (+351% five-year return). Find your next big winner with StockStory today.
StockStory is growing and hiring equity analyst and marketing roles. Are you a 0 to 1 builder passionate about the markets and AI? See the open roles here.
