3 Arguments for Selling RXO and One Alternative Stock Worth Buying

RXO Stock Faces Challenges Amid Market Gains

In the past half-year, RXO's stock price has dropped to $15.44, resulting in a 9.4% decline. This underperformance stands in sharp contrast to the S&P 500, which has risen by 5.6% during the same period. The disappointing results from recent quarters have contributed to this downturn, leaving investors uncertain about the best course of action.

Should investors consider buying RXO at these levels, or does the stock pose too much risk?

Key Reasons We Remain Cautious on RXO

Although RXO shares are now more affordable, our confidence in the company remains low. Below are three main concerns that keep us on the sidelines, along with an alternative stock we prefer.

1. Stagnant Sales Volumes Signal Weakening Demand

Revenue growth in the ground transportation sector depends on both pricing and the number of units sold. Of these, volume is especially critical, as there is a limit to how much customers are willing to pay. Over the last two years, RXO has not managed to increase its sales volume, which points to either intensifying competition or a saturated market. This stagnation may force RXO to cut prices or invest more heavily in its offerings, both of which could weigh on short-term profits.

RXO Units Sold

2. Declining Returns on New Investments

We favor companies that consistently deliver strong returns, but the direction of a company's Return on Invested Capital (ROIC) is often what drives stock performance. RXO's ROIC has dropped considerably in recent years, and given its already modest returns, this trend suggests that lucrative growth opportunities are scarce.

3. Elevated Debt Poses Financial Risks

For long-term investors, the greatest threat is a permanent loss of capital, which can occur if a company faces bankruptcy or is forced to raise funds under unfavorable conditions. RXO currently holds $670 million in debt, far outweighing its $17 million in cash reserves. Its net-debt-to-EBITDA ratio stands at 6×, based on $109 million in EBITDA over the past year, indicating a high level of leverage.

RXO Net Debt Position

With such significant debt, borrowing additional funds becomes more costly, and a decline in profitability could prompt credit downgrades. If market conditions deteriorate unexpectedly, RXO could find itself in a precarious position—something we aim to avoid when seeking high-quality investments.

We remain hopeful that RXO will strengthen its financial position, but for now, we advise caution until the company either boosts its earnings or reduces its debt load.

Our Verdict

RXO does not meet our standards for a high-quality investment. Following its recent decline, the stock trades at a forward EV-to-EBITDA multiple of 31.2× (or $15.44 per share), which suggests that much optimism is already reflected in the price. We believe there are more attractive opportunities available. For example, consider a resilient company behind the popular Taco Bell brand.

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