RXO stock soars after new acquisition

Shares RXO Inc. NYSE: RXO are up more than 20% for the week, something investors likely didn’t expect from the “boring” transportation sector. The sector is known for its low beta, or in English, low volatility. RXO stock has a beta of less than 1.0, meaning the company’s share price will move less than the daily moves of the broader S&P 500 index.

Because of this quiet behavior, investors must investigate why the stock is moving so aggressively fast. The answer lies in an announcement earlier this week, when RXO management announced a new potential acquisition deal. United Parcel Service Inc. NYSE:UPS would divest its Coyote Logistics division for a reported valuation of $1 billion. RXO will be there to foot the bill.

Given that United Parcel Service shares remained flat or negative following the news, investors might assume that getting rid of Coyote Logistics isn’t the best move for the company. But trash quickly becomes treasure, or so Wall Street’s predictions for the future of RXO stock suggest today.

RXO dominates the market, promising investors growth prospects

The transportation industry is set to change, especially the truckload brokerage and services sector, where investors can expect RXO to start making bigger strides forward. A key factor enabling this is the company’s size.

RXO’s $3 billion market cap is significantly lower than United Parcel Service’s $117 billion market cap and its competitor’s value KnightSwift Transportation Holdings Inc. NYSE: KNX and its $8 billion market cap. Some investors may see its smaller size as a problem. Still, it could benefit a changing economy that has remained unchanged since the COVID-19 pandemic.

Why? RXO can adapt and switch from one strategy to another faster than its larger competitors because it takes longer for a tanker to change course than a motorboat. Wall Street analysts know this, so they are currently forecasting earnings per share (EPS) growth for RXO stock this year of 261.1%.

While these are bold assumptions, the market has welcomed them, and the stock has risen to a P/E multiple of 41.9x, a premium of 141% over KnightSwift’s valuation of 17.4x and a premium of 200% over United Parcel Service’s P/E multiple of 14.1x.

Of course, price action should be viewed as just another proxy. RXO stock is trading at a new 52-week high, even after discounting the recent news rally, leaving KnightSwift stock down 81% and United Parcel Service as the underdog at just 70% of its 52-week high.

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

The company was kind enough to put together a detailed investor presentation on its website, but it usually involves a lot of marketing and “feel good” angles. Going beyond those factors and getting 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. Given that it’s the fourth-largest truckload broker in the U.S., the addition of Coyote Logistics would diversify the company’s transportation business into food and beverage and make it — reportedly — the third-largest in the country.

While RXO currently has only 4,000 customers, Coyote Logistics would add about 15,000 customers and more than 97,000 carriers. What’s more, adding Coyote’s $3.2 billion in revenue would nearly double RXO’s current $3.9 billion.

Best of all, the company isn’t taking on any debt or using any cash to complete this deal, so investors don’t have to worry about RXO taking on a mountain of debt to complete this deal, as is often the case in other M&A 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. It will not impact current shareholders. That’s brilliant.

Of course, this is not a done deal yet, so investors must wait for regulatory approvals and other formalities. For this reason, management expects the deal to close by the end of 2024, so any dip in RXO stock could be a great opportunity.

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