Transport stocks pullback presents investment opportunities? Citi optimistic about industry cycle improvement, upgrades XPO (XPO.US) rating to "Buy"

Zhitong Finance APP has learned that Citi Research believes the recent broad pullback in the US transportation sector has made freight stock valuations attractive again. Analyst Ariel Rosa has become more optimistic about the industry outlook and has upgraded the rating of less-than-truckload (LTL) company XPO (XPO.US) from “Neutral” to “Buy”, also expecting the company to post strong results for the third quarter.

Last month, JB Hunt Transport Services (JBHT.US) issued a profit warning, triggering a collective decline in the freight sector. Rosa believes this adjustment has led to a “valuation reset” for the entire transportation sector, which is a relatively healthy correction and has created more attractive entry opportunities for investors. While macroeconomic risks such as high fuel prices and rising interest rates may keep the market cautious, the sector’s lower valuations have reopened potential upside.

Rosa pointed out that macroeconomic downside risks have increased in recent months, but the transportation industry cycle still has room for further improvement. As industry capacity tightens further, contract transportation prices are expected to gain more upward momentum before 2027, which will support the profitability of companies in the sector.

Against this backdrop, Citi lists C.H. Robinson Worldwide (CHRW.US), Saia (SAIA.US), TFI International (TFII.US), GXO Logistics (GXO.US), and XPO (upgraded to “Buy” this time) as its top picks in the sector, and also favors United Parcel Service (UPS.US) and FedEx (FDX.US).

Regarding XPO’s upcoming third-quarter results, Rosa expects the company’s freight tonnage to achieve mid-single-digit percent growth, while higher fuel surcharges are likely to support earnings before interest and taxes (EBIT). In addition, XPO’s current pricing environment remains favorable and is expected to improve further in the fourth quarter.

Citi estimates that about half of XPO’s third-quarter unit revenue growth will come from core pricing improvements, with the other half from optimizing the business mix. As the company continues to expand in local transportation, premium services, and food and grocery client segments, its 13 percentage-point gap with industry leader Old Dominion on key revenue metrics is expected to narrow further.

Rosa stated that XPO continues to benefit from relatively healthy market demand, along with consistent market share gains. Among LTL peers, the company is on track to outperform industry averages in both freight volume and pricing growth, which is a key reason for Citi’s rating upgrade.

Improved cash flow also supports XPO’s investment case. Citi anticipates XPO’s free cash flow will double year-over-year to about $800 million this year and reach $1 billion by 2027. As the company’s cash generation strengthens, the scale of future share repurchases could be further expanded.

XPO plans to release its third-quarter results before the US market opens on October 29. The market currently expects the company’s revenue for the quarter to be about $2.37 billion, with adjusted earnings per share at $1.57.

Currently, both Wall Street analysts and US investment research and finance platform Seeking Alpha have a consensus “Buy” rating on XPO. Seeking Alpha’s quantitative rating is also “Buy”, with a score of 4.31 out of 5. Overall, Citi believes that after the recent valuation pullback, if the transportation industry cycle improves, capacity tightens, and contract pricing continues to rise, the risk-reward profile for freight stocks such as XPO has significantly improved compared with before.