Boring, Difficult, and Sexy As F

There’s nothing sexy about 18-wheelers or warehouses. Especially not when the newsletter down the street is talking about artificial intelligence and driverless cars.

But these trucks and buildings are the backbone of the global economy, and can be the backbone of your portfolio as well. Alas, they can also be your ruin.

You see, logistics is hard.

Don’t believe me?

Ask Shopify, who just a year after buying Deliverr for $2.1 billion and jumping head first (and to great fanfare) into logistics announced earlier this month they were selling Deliverr and walking away from the whole thing. After one year.

Shopify bought Deliverr to try to keep pace with Amazon, the self-proclaimed gold standard in e-commerce logistics. Over at Amazon, things are going so well with logistics that the company is now willing to pay you $10 if you come get your package yourself.

I tell you, logistics is hard.

But logistics is important. As an investor I am not really excited about any e-commerce stock. I see great growth ahead for e-commerce (really a groundbreaking call there, I know). But it has become a commoditized, cut-throat business where all the easy gains have been made. It is slow and steady from here.

The back end is where things are interesting, and nowhere more so than logistics. What Shopify and Amazon have admitted by investing billions in logistics is its importance to the entire e-commerce movement. In 2023, putting up a website and selling stuff is easy. Obtaining that stuff, managing your stock, getting it to the buyer, and then figuring out what to do when the buyer changes their mind? That’s hard.

I’ve talked before about how I like to find “aspirin stocks,” companies that specialize in a particular thing and in doing that thing well eliminate a major pain point for their customers. E-commerce needs an aspirin stock to handle logistics.

If you follow me on Twitter (if so, my apologies) or have ever heard me talk about stocks, you likely already know that I think I’ve found just such a company for the logistics world.

Before I go any further, I should say I own a good bit of GXO Logistics. I intend to continue to hold it for the foreseeable future. I can’t tell you whether you should own this company too, or if you do own it, whether you should sell it or buy more or do nothing. But as a holder myself, I do have thoughts on where the company is right now.

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For those who don’t yet know, GXO Logistics was spun out of what was then known as XPO Logistics in August 2021. XPO was an amazing investment. I’ve talked about it before. Today’s XPO is a trucking company. GXO was the logistics arm of the business. It is in the business of “supply chain management solutions,” which is a fancy way of saying it runs warehouses, handles shipping, optimizes supply chains, handles returns (what we call “reverse logistics”), and does other related tasks for its corporate customers.

It’s all pretty boring. But it is a real pain to get right. Especially at scale. Especially the returns part. GXO customers like Apple, Nike, Nestle, and Whirlpool all have the resources to invest in doing it themselves. But they have better things to do with their cash. So instead, Apple just had what is now GXO build it a 1 million-square-foot distribution center in Indiana and let them handle it.

Perhaps none of these customers can match the scale of Amazon. But working together through an outside vendor, economies of scale can kick in.

It is a massive, 12-figure opportunity. GXO had $9 billion in annual revenue last year, and they are the market leader.

The risk is, logistics is hard. Before the split XPO was spending millions annually on technology (a very non-transport sounding thing to do) to be a market expert on things like warehouse automation and schedule management. But GXO as a standalone is selling itself as the answer. It can afford no screwups.

And while the long-term payoff of outsourcing should be substantial for customers, it doesn’t necessarily translate to near-term savings. In a tough economy where costs are rising, it is possible GXO’s new business momentum will slow at least for the time being. And once momentum slows, there is no guarantee it ever returns.

With all that in mind, I was very interested in reading GXO’s most recent earnings report. The highlights:

• Revenue was up 12% year over year, organic revenue was up 7%

• The sales pipeline grew to about $2.3 billion

• GXO signed its largest-ever annual revenue contract with an unnamed customer

• The company did the heralded “beat and raise,” beating the consensus estimate for the quarter and raising full year EBITDA and earnings per share guidance

Some caveats… Some of that bottom line “beat” for the quarter appears to be tax-related. Also, free cash flow wasn’t anything to brag about. That was partially seasonal. Partially investing due to the growth.

But by in large it has been a lousy quarter for transports facing a slowing economy and higher costs, and GXO was a standout for all the right reasons.

And that growth is solid. GXO expects to book $782 million in revenue in 2023 from contract wins, and already has about $362 million in expected 2024 revenue from future contracts coming out of the pipeline.

Which isn’t to say 🚀🚀🚀. These businesses by their nature do not tend to come with stocks that go to the moon or anywhere else. I haven’t bought GXO shares for a while now, and for a variety of reasons I am unlikely to buy more right now. And I have no idea whether you should even own stocks, let alone this particular one.

But at the risk of turning this newsletter into an investing thing, I do believe it is a good idea for me to check in on some of my favorite stocks and since I talk about them so often on Twitter I might as well try to chronicle some of those thoughts here.

Who said logistics isn’t sexy?

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