On Tuesday, Citi made a significant change to its rating for RXO, Inc. (NYSE: RXO), shifting from a "Buy" to a "Neutral" stance. Alongside the rating change, the firm has established a price target for RXO at $33.00.
The adjustment comes after evaluating the impact of RXO's recent acquisition of Coyote in September 2024. Citi acknowledges that the acquisition has indeed enhanced RXO's scale and capabilities within the freight brokerage sector.
The firm notes that the benefits of increased size and scale, as well as improved market visibility with carriers and shippers, are likely already reflected in the current stock price. These factors are recognized as having the potential to bolster margins and strengthen RXO's competitive position against other brokerage firms.
Despite these potential benefits, Citi has decided to adopt a more cautious approach. The firm indicates that it will remain on the sidelines, closely monitoring RXO's performance. Specifically, Citi is looking for RXO's management team to demonstrate further progress in realizing synergies from the acquisition and in generating free cash flow (FCF) at sustained levels.
The shift in rating to "Neutral" suggests that Citi is taking a wait-and-see approach regarding RXO's ability to capitalize on its recent expansion and to deliver consistent financial results post-acquisition. The new price target of $33.00 is set with these considerations in mind, as investors and analysts alike will be watching to see how the company navigates the post-acquisition landscape.
In other recent news, RXO Inc. reported its third-quarter results, highlighting a successful integration of Coyote Logistics and an upward revision of anticipated cost synergies from $25 million to $40 million. The company's Q3 revenue stood at $1.04 billion, with an adjusted EBITDA of $33 million, surpassing Stifel's estimate of $32.3 million. Despite a 5% year-over-year decline in brokerage volume, RXO saw an 11% growth in Last Mile stops.
Stifel revised its price target for RXO, reducing it to $26 from the previous $28, maintaining a Hold rating on the stock.
The firm acknowledged several positive developments for RXO, including the ahead-of-schedule integration of Coyote and a decrease in the company's leverage by 40%. However, concerns were raised about the potential impact of business being pulled forward, which may have affected the third-quarter operating results.
Looking forward, RXO anticipates a Q4 adjusted EBITDA to be between $40 million and $45 million, despite a potential decline in adjusted EBITDA moving into Q1. The company continues to focus on long-term growth and customer relationships amidst challenging market conditions.
These are the recent developments that investors should consider.
InvestingPro Insights
Recent data from InvestingPro sheds additional light on RXO's financial position and market performance, providing context to Citi's rating change. Despite the downgrade, RXO has shown a strong market performance with a 63.12% price total return over the past year and a significant 42.35% return in the last six months. This aligns with the InvestingPro Tip highlighting RXO's "high return over the last year."
The company's market capitalization stands at $4.73 billion, reflecting its substantial presence in the freight brokerage sector. However, RXO's profitability remains a concern, as indicated by its negative P/E ratio of -106.75 for the last twelve months. This is consistent with the InvestingPro Tip noting that RXO is "not profitable over the last twelve months."
Looking ahead, an InvestingPro Tip suggests that "net income is expected to grow this year," which could potentially address profitability concerns. Additionally, RXO "operates with a moderate level of debt," which may provide financial flexibility as it integrates the Coyote acquisition and seeks to realize synergies.
For investors seeking a more comprehensive analysis, InvestingPro offers 7 additional tips for RXO, providing a deeper understanding of the company's financial health and market position.
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