RXO Needs to Raise Equity
Weak results and a soft freight market are not RXO’s central problems - it is the lack of cash. RXO needs to raise equity to fund ongoing losses, in our opinion.
The Disclaimer at the end of this post is important.
RXO reports 3Q25 numbers next week. Competitors have reported weak results in brokerage. Trucking volumes are down. However, persistent weakness is not RXO’s primary problem.
The problem is cash.
RXO is currently utilizing its revolver on an intra-quarter basis to fund operations. However, accumulating cash losses means that is a short-term fix. The company needs to raise permanent capital, in our view.
We think debt is unlikely to be an option. Debt analysts have generously looked away as RXO has violated every credit metric put forth. However, patience is not without end and we suspect there would be a ratings consequence to adding more debt. That leaves equity.
A straight equity raise would provide capital to cover cash losses, but we think a deal is more RXO’s style. We would not be surprised to see the company announce the acquisition of a loss-making enterprise, reframing it as a growth/synergies opportunity, while raising more capital than needed for the transaction. This strategy was employed with the Coyote acquisition.
The cash problem needs to be solved. Will management admit it or will a coincident transformational, accretive transaction materialize? We shall see.
Watch One-time Expenses
The company’s y/y adjusted EBITDA comp is likely to look reasonable in the quarter, because Coyote was only partially included in 3Q24. However, it is worth keeping a close eye on the transaction and restructuring EBITDA add-back accounts.
We would interpret an uptick in one-time expenses as an exercise in managing EBITDA by firing employees.
Stick to Reality
Pure freight brokerage is a commoditized business. Many of RXO’s competitors benefit from being part of a larger organization where brokerage is a subsidized bolt-on service. Subsidized, because they lose money. This was the case with Coyote within UPS – until volatility and losses exceeded management’s pain threshold. Ongoing issues at Uber Freight apparently exceeded management’s pain threshold as well, and in October the company announced a significant restructuring.
RXO’s management may point to future adjusted EBITDA as hope on the horizon, but investors need to focus on cash, or more precisely, the absence of it and how management intends to fill the holes.
DISCLAIMER
This report represents the opinions of Keith Dalrymple and Dalrymple Finance on RXO, Inc. It is an opinion piece, reflects our biases and should not be taken as investment advice of any kind. This is not an offer to sell or a solicitation of an offer to buy any security, nor shall any security be offered or sold to any person.
According to Yahoo Finance 17 sell-side analysts cover RXO. Sell-side analysts are licensed professionals. They likely have significantly more resources than Dalrymple Finances. They also likely have access to management. We strongly encourage those seeking investment advice to consult one or more of the sell-side research professionals covering the stock.
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