It makes sense to try and get ahead of the crowd, and that's why stocks like GXO Logistics (NYSE: GXO) and Honeywell (NASDAQ: HON) should be high on investors' lists of stocks to look at. Both companies look set to benefit from a pickup in growth in e-commerce spending that will encourage capital spending in the future.
Here's why these two stocks could be great additions to a portfolio.
The e-commerce cycle is turning
In truth, the growth in e-commerce spending has never really gone away. Still, the cadence of the development often means more than anything. That observation rings true when considering what happened in the e-commerce market in the U.S. over the last five years.
It was growing a mid-teens clip before the pandemic struck, and then the lockdowns imposed on the populace led to a massive surge in demand in 2020. Moreover, as you can see in the chart below, 2021 was also an exceptional year, both on a year-over-year basis and considering how strong the previous year's growth was. Let's put it this way: U.S. e-commerce spending in 2021 was a whopping 67% above the level in 2019.
Data source: Census.gov, 2024 & 2025 forecast from emarketer.com
Why the chart means so much to GXO Logistics
The massive increase in 2020 and 2021 pulled forward investment by various companies in their e-fulfillment and logistics efforts to support their e-commerce efforts. Established players increased their investments, and lockdowns compelled retailers to do the same. As such, it's hardly surprising that transportation and shipping specialist XPO Logistics chose to spin off GXO Logistics in the summer of 2021.
GXO claims to be "the world's largest pure-play contract logistics provider." That means it designs and operates warehouse solutions for retailers and is strongly positioned in the e-commerce sector. One key advantage GXO has in helping retailers outsource their warehouse operations is its use of productivity-enhancing technology (including automation and predictive analytics).
Given the increasing complexity and the specialized knowledge and experience required to generate these improvements, more companies will likely opt to outsource this function to GXO.
After a slow period, which coincides with the chart above, GXO is back on the growth path. CEO Malcolm Wilson noted on the company's recentearnings call "We're seeing inventory levels returning to normal, and demand for e-commerce capacity is accelerating."
He affirmed the company's 2027 growth target, as laid out below. Trading at 21.7 times expected 2024 earnings, GXO is an excellent growth at a reasonable price option for investors.
|
Metric |
2021 |
2022 |
2023 |
2024 |
2024-2027 CAGR |
|---|---|---|---|---|---|
|
Organic revenue growth |
15% |
15.4% |
2% |
2%-5%* |
~10%* |
Data source: GXO Logistics presentations. *Management estimates. CAGR = Compound annual growth rate.
Why the chart means so much to Honeywell International
Honeywell International's two business segments with the most exposure to e-commerce spending, namely warehouse and workflow solutions and productivity solutions and services, are the smallest segments it manages. That said, they have been the worst performing, alongside the company's personal protective equipment (PPE) segment, over the last few years.
Indeed, their performance has been so bad that it's negatively impacted the stock, which was a large part of why activist investor Elliot Investment Management believes the company should be broken up.
It's not hard to see why. As noted above, the previous boom in e-commerce-related spending caused by the lockdowns subsided, reducing warehouse automation spending. It was a similar story with productivity solutions (where retail and logistics customers cut back on spending), and there's no need to go into too much detail about what happened with PPE sales after the lockdowns and mask mandates ended.
But here's the thing. Honeywell's aerospace, building automation, and process solutions are performing well. Meanwhile, management recently announced it would sell its PPE business, and the productivity solutions grew orders and revenue at a double-digit rate in the third quarter, excluding the impact of a legal settlement.
Unfortunately, the warehouse and workflow business continues to decline year over year, with a 29% decline in the third quarter. Still, as management noted on the recentearnings call the business grew sequentially in the third quarter, and management expects the same in the fourth quarter.
CEO Vimal Kapur argued that investing in warehouse automation requires a "several hundred million or sometimes even in $1 billion" commitment in spending, so it's understandable if it will take time for the market to recover. If e-commerce spending keeps growing at the rates forecast in the chart above, the business will start growing again sooner rather than later.
All told, Honeywell's weakest business will get stronger with more e-commerce spending, and if so, management will be in a much stronger position to consider breaking up the company at some point. As such, it's an integral part of the investment case for the stock.
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*Stock Advisor returns as of November 25, 2024
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends GXO Logistics and XPO. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
