RXO Shares Surge Following New Acquisition Deal

Key Points

• RXO stock has been up over 20% in a week, a reaction to the company's announcement of its intention to acquire Coyote Logistics.
• This acquisition would nearly double and triple some of RXO stock's main growth drivers.
• Markets are willing to bid RXO stock's valuations higher, and Wall Street analysts now see over 200% EPS growth.

Shares of RXO Inc. NYSE: RXO are up more than 20% on the week, something investors probably didn’t see coming out of the ‘boring’ transportation sector. This sector is notorious for having a low beta, English for low volatility. RXO stock has a beta below 1.0, meaning the company’s stock price will move less than the daily move in the broader S&P 500 index.

Because of this quiet behavior, investors need to investigate why the stock is moving so aggressively quickly. The answer lies in an announcement made earlier in the week when RXO management announced a new potential acquisition deal. United Parcel Service Inc. NYSE: UPS would be letting go of its Coyote Logistics branch for a stipulated $1 billion valuation. RXO will be there to pick up the bill.

Considering that shares of United Parcel Service were flat to negative upon the news release, investors can somewhat assume that letting go of Coyote Logistics is actually not the best move for the company, but what is one man’s trash quickly becomes one man’s treasure, or so do Wall Street forecasts suggest for the future of RXO stock today.

RXO Dominates the Market with Promising Growth Prospects for Investors

The transportation industry is due for a change, particularly the truckload brokerage and services sector, which is exactly where investors can expect RXO to start churning out some bigger steps moving forward. The company’s size is the main factor enabling this to be the case.

A $3 billion market capitalization for RXO stands well below United Parcel Service’s $117 billion and peer KnightSwift Transportation Holdings Inc. NYSE: KNX and its $8 billion market capitalization. Some investors may view a smaller size as an issue. Still, this could benefit a changing economy, which has remained constant since the COVID-19 pandemic.

Why? RXO can adjust and move from one strategy to another quicker than its bigger peers, as a tanker ship takes longer to change course than a speedboat. Wall Street analysts know this, so they are now forecasting up to 261.1% earnings per share (EPS) growth for RXO stock this year.

While bold, the market is welcoming these assumptions, as the stock is now bid up to a forward P/E ratio of 41.9x, commanding a premium of 141% over KnightSwift’s 17.4x valuation and a premium of 200% over United Parcel Service’s 14.1x forward P/E multiple.

Of course, price action needs to be considered as another proxy. RXO stock trades at a new 52-week high, even discounting the recent news rally, leaving KnightSwift stock behind on its 81% and United Parcel Service as the bottom performer at only 70% of its 52-week high.

What the New Deal Means for RXO Stock: Key Takeaways for Investors

The company was kind enough to make a detailed presentation for investors on its website, but those typically involve a lot of marketing and ‘feel good’ viewpoints. Moving outside of those factors and into the meat of the deal, here’s what investors can expect.

Scale and diversification are the two main effects this acquisition could have on RXO stock. Considering it is the fourth largest truckload broker in the U.S., adding Coyote Logistics will diversify the company’s transport into food and beverage and make it—reportedly—the third biggest in the nation.

While RXO only counts 4,000 customers today, Coyote Logistics would bring roughly 15,000 customers and over 97,000 carriers on board. More than that, adding Coyote’s $3.2 billion in revenue would nearly double RXO’s current $3.9 billion.

And the best part? The company is taking no debt and using no cash to make this transaction happen, so investors don’t need to worry about RXO swallowing up a mountain of debt to make this deal happen, as is often the case in other mergers and acquisitions examples.

The financing for this acquisition will come from outside investors MFN Partners and Orbis Investments, who are sponsoring RXO in this new venture to exchange equity in the new combined company. This won't affect current shareholders. It's brilliant.

Of course, this is far from a done deal, so investors must wait for regulatory approval and other paperwork to be cleared. Because of this, management expects the deal to close by the end of 2024, so any dips in RXO stock could be an excellent opportunity.