Jefferies has reaffirmed its Buy rating and $31.00 price target for RXO, Inc. (NYSE: RXO), following the company's announcement regarding the financing of its Coyote deal.
The brokerage firm noted that the transaction, previously expected to be funded through a mix of 70% equity and 30% debt, will now be financed entirely with equity.
The analyst from Jefferies highlighted the significant impact of this change in funding strategy on RXO's financials. The all-equity deal is set to transform the company's balance sheet, reducing its trailing twelve-month leverage ratio from 3.2x to 1.7x.
The reduction in leverage is seen as a positive move, potentially leading to an increase in earnings per share (EPS) and free cash flow (FCF), owing to the lower interest expenses that would have been incurred with debt financing.
The reiteration of the Buy rating and price target is based on a revised fully diluted share count projection. The new estimate stands at 169 million shares, an increase from the previously anticipated 160 million shares. This adjustment reflects the additional equity that will be issued to fund the Coyote acquisition fully.
The equity funding decision for the Coyote deal by RXO is viewed as a strategic move that could enhance the company's financial health and value to shareholders. The Jefferies analyst's commentary underscores the potential for improved profitability and cash generation as a result of the reduced debt load and associated interest costs.
In other recent news, RXO has announced a $350 million stock offering, intended to partially finance its acquisition of Coyote Logistics from UPS. The acquisition, valued at $1.025 billion, is anticipated to enhance RXO's truckload freight brokerage services. RXO also introduced a prepay feature for its RXO Fuel Card, offering drivers the ability to pre-fund their fuel purchases.
On the financial front, RXO secured $550 million through private financing for the acquisition of Coyote Logistics. The company also extended its financial flexibility by amending its credit facilities, introducing a new $200 million delayed draw term loan facility, and extending a $600 million revolving credit facility.
In terms of analyst ratings, Susquehanna raised RXO's stock price target to $20.00 but maintained a Negative rating on the stock. Similarly, TD Cowen maintained its Hold rating on RXO, raising the price target to $28.00.
InvestingPro Insights
As RXO, Inc. navigates through its equity-funded acquisition strategy, real-time data from InvestingPro offers additional context to the company's current financial position. With a market capitalization of approximately $3.6 billion, RXO is showing signs of a challenging financial performance, including a negative revenue growth rate of -10.26% over the last twelve months as of Q2 2024. Despite this, the company's gross profit margin remains at a steady 18.3%, indicating a level of operational efficiency.
InvestingPro Tips suggest that while net income is expected to grow this year, analysts have revised their earnings expectations downwards for the upcoming period. This sentiment is reflected in the stock's recent performance, which has taken a significant hit over the last week, with a price total return of -7.74%. Nevertheless, the company has experienced a strong return over the last three months, boasting a 25.66% increase, which may align with Jefferies' optimistic outlook.
With the company not paying dividends and trading at a high price-to-book multiple of 6.22, investors may weigh the benefits of potential earnings growth against valuation concerns. For those interested in a deeper dive into RXO's financials and future projections, InvestingPro offers additional tips, with a total of 11 listed for RXO, providing a more comprehensive understanding of the company's investment potential.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.