It's no secret that the industrial sector is struggling. High interest rates and inflation have lifted borrowing costs and costs for materials and labor, and inflation has squeezed end consumers as well.
The ISM just reported its lowest manufacturing reading since November as its index fell from 48.5 in June to 46.8 in July, indicating a worsening contraction and other economic data points to weakness as well.
However, in this challenging environment, XPO (NYSE: XPO) , one of the largest providers of less-than-truckload transportation in North America, continues to shine, and it just delivered another round of impressive results last week
The company beat estimates on top and bottom lines and continues to look like a strong buy, especially with interest rate cuts expected as soon as September. Let's take a closer look.
Image source: XPO.
LTL 2.0 is paying off
When XPO split from GXO Logistics, its former logistics arm, in 2021, it announced a bold improvement plan known as LTL 2.0 to revamp the business and improve the operating ratio by at least 600 basis points.
The company continued to make progress toward that goal in the second quarter thanks to operational expansion and improved customer satisfaction, which has led to market share gains and higher prices.
For example, the company reduced its damage claims ratio to 0.2% in the quarter, the best in its history, down from 1.2% just two years ago. Chief Strategy Officer Ali Faghri noted in an interview with The Motley Fool that the use of tools like airbags and straps helped lower damage rates, along with new technology and incentives associated with reducing damage.
XPO has also made strides with its on-time rate and the increased customer satisfaction helped drive a 9% increase in yield, or price, in the quarter in North America, as well as a 3.4% increase in tonnage and a 4.5% gain in shipments. As a result, North American revenue jumped 12% and overall revenue rose 8.5%, which includes its European unit, to $2.08 billion, just ahead of the consensus at $2.07 billion.
However, the bottom-line improvements were even more impressive. The company reduced its use of purchased transportation in the quarter, or outsourced linehaul carry, and that, along with higher prices, helped lower the adjusted operating ratio in the core North America segment by 440 basis points (hundredths of a percentage point) to 83.2%, meaning the operating margin improved from 12.4% to 16.8%. An increase in local transportation with smaller customers also helped boost margins. On the bottom line, adjusted earnings per share surged 58% to $1.12, ahead of the consensus at $1.01 billion.
The company also said that 14 of the 28 terminals it acquired from Yellow were now operational, and it expected to bring another 10 online this year. Additionally, it's been expanding its trailer fleet as it expands capacity to meet rising demand.
Why XPO can keep gaining
XPO's strong second-quarter performance came even in difficult macro conditions, and the company should be able to make more progress on margins and yield, as Faghri said that many of the company's internal initiatives were still in their "early innings."
XPO should also benefit from a tailwind when interest rates start to fall, as high rates have helped suppress demand. The Federal Reserve is expected to start lowering interest rates in September. Faghri predicted that customers would start spending more money and that the freight industry would return to growth.
If XPO can keep its current momentum, it could see even stronger growth once industry-level tailwinds return, and a stronger holiday season than that of a year ago also seems likely as many of its retail customers were focused on paring inventory last year.
LTL stocks like XPO, Saia , and Old Dominion Freight Line have generally been winners, as operating in the LTL business is difficult to do at scale but provides ample opportunity for margin expansion when done well.
With the LTL 2.0 strategy, improvements in customer satisfaction, and capacity expansion, XPO seems to be well on track to further gains. The stock looks a great buy with interest rates set to come down soon.
Jeremy Bowman has positions in GXO Logistics and XPO. The Motley Fool has positions in and recommends Old Dominion Freight Line. The Motley Fool recommends GXO Logistics and XPO and recommends the following options: long January 2026 $195 calls on Old Dominion Freight Line and short January 2026 $200 calls on Old Dominion Freight Line. The Motley Fool has a disclosure policy .
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