The Zhitong Finance App learned that Citi Research believes that the recent general correction in the US transportation sector has made freight stock valuations attractive again. As a result, the bank's analyst Ariel Rosa turned optimistic about the industry's prospects and raised the LTL (XPO.US) rating from “neutral” to “buy”. At the same time, the company's third-quarter results are expected to be strong.
Last month, JB Hunter Transportation Services (JBHT.US) issued a profit warning, triggering a collective decline in the freight sector. Rosa believes that this round of adjustments has driven the entire transportation sector to experience a “valuation reset”, which is a relatively healthy correction and has created more attractive entry opportunities for investors. Although macro-risks such as high fuel prices and rising interest rates may still cause the market to remain cautious, falling sector valuations have reopened potential room for growth.
Rosa pointed out that macroeconomic downside risks have increased in recent months, but the transportation industry cycle is still expected to continue to improve. As the industry's capacity is further tightened, contract transportation prices are expected to gain more room to increase by 2027, which will support the profit performance of related companies.
In this context, Citi listed Robinson Logistics (CHRW.US), Saia (SAIA.US), TFI International (TFII.US), GXO Logistics (GXO.US), and XPO, which was upgraded to “buy” this time, as the industry's first choice, and is optimistic about United Parcel (UPS.US) and FedEx (FDX.US).
Regarding XPO's upcoming third-quarter results, Rosa expects the company's freight tonnage to record a mid-single-digit percentage increase, while higher fuel surcharges are expected to support profit before interest and tax (EBIT). Furthermore, XPO's current pricing environment remains favorable and is expected to improve further in the fourth quarter.
Citi expects that about half of XPO's third-quarter unit yield increase will come from core pricing improvements, while the other half will come from business portfolio optimization. As the company continues to expand key businesses such as local transportation, high-end services, and grocery customers, the 13 percentage point gap with industry leader Old Dominion in related revenue indicators is expected to narrow further.
Rosa said that XPO is still benefiting from healthier market demand while its market share continues to increase. Among LTL transportation peers, the company's freight volume and price growth are expected to exceed the industry average, which is also an important basis for Citi to upgrade its rating.
Improved cash flow also forms part of XPO's investment logic. Citi predicts that XPO's free cash flow is expected to double to about 800 million US dollars this year over year and reach 1 billion US dollars in 2027. As its ability to generate cash increases, the company may further expand the scale of share repurchases in the future.
XPO plans to announce third-quarter results before the US stock market opens on October 29. The market currently expects the company's revenue for the quarter to be approximately US$2.37 billion, with adjusted earnings per share of US$1.57.
Currently, Wall Street analysts and the US investment research and financial information platform Seeking Alpha all give XPO a “buy” consensus rating. The Seeking Alpha quantitative rating also gives a “buy” rating of 4.31 (out of 5). Overall, Citi believes that after experiencing a recent correction in valuation, if the trend of improving the transportation industry cycle, tightening capacity, and rising contract prices continues, the risk-return level of freight stocks such as XPO has improved markedly compared to before.