XPO, Inc.: Riding Index Inclusion and Operational Turnaround to Outperform

XPO, Inc. (NYSE:XPO) recently secured a pivotal milestone with its inclusion in the Russell 3000E Value Index, effective June 30, 2025. This move positions the logistics giant to capitalize on passive fund inflows, while its 15% earnings growth forecast and a 7.1% discount to fair value suggest compelling upside. Despite near-term debt risks and market volatility, XPO's strategic moves—including the Yellow Corp acquisition—signal a shift toward operational excellence and valuation re-rating. Here's why investors should take note.

Index Inclusion: A Catalyst for Liquidity and Visibility

XPO's addition to the Russell 3000E Value Index is more than a symbolic win. The Russell indexes, benchmarked to $18.1 trillion in global assets, attract passive fund flows that automatically rebalance portfolios to mirror index changes.

reveals this index outperformed the broader market during value-driven cycles, suggesting XPO could benefit from renewed investor interest in undervalued, growth-oriented stocks. The effective date aligns with XPO's Q2 earnings beat, which showcased margin improvements and accretive synergies from its Yellow Corp deal.

Growth Catalysts: Yellow Acquisition and Operational Turnaround

The $870 million acquisition of 28 Yellow Corp service centers in late 2024 is central to XPO's growth story. This move expanded its North American LTL (Less-Than-Truckload) footprint, enabling cost savings and revenue synergies. Key outcomes include:- 2025 EBITDA accretion: The deal is projected to turn earnings-positive this year, with 53% lower purchased transportation costs.- Margin expansion: XPO's adjusted operating ratio improved by 440 basis points in Q2 to 83.2%, driven by yield discipline and fleet modernization.- Service quality: Damage claims hit a record-low 0.2%, while on-time performance improved for nine straight quarters.

reflect these tailwinds, with analysts forecasting 15% annual earnings growth through 2027—a rate outpacing the broader U.S. market's 14.7% average.

Valuation: A 7.1% Discount to Fair Value

XPO's stock trades at a 7.1% discount to its fair value, based on Peter Lynch's formula:
[\text{Fair Value} = \text{EPS} \times (8.5 + P/E Growth Rate)]
With trailing EPS of $3.09 and a 25% growth cap (capped at Lynch's 25% limit), this yields a fair value of $77.15, versus a current price of ~$75. Meanwhile, a discounted cash flow (DCF) analysis

suggests further upside, despite near-term overvaluation concerns. Analysts' price targets remain mixed—a $137 target (down 7%) contrasts with a $45 bearish view—but the stock's 20% undervaluation post-April's 15% dip highlights its resilience.

Risks: Debt and Margin Pressures

The Yellow acquisition's $870 million price tag raised leverage concerns.

shows the ratio rising to 1.8x, though management has offset this with $750 million in buybacks and cost-cutting. Risks persist, however:- Debt servicing: XPO's reliance on senior secured loans requires disciplined capital management.- Margin sustainability: Fuel inflation and soft freight demand in Q2 2025 threaten to compress margins, though yield growth and fleet efficiency mitigate this.

Investment Thesis: Buy the Dip, Monitor Debt

XPO's inclusion in the Russell 3000E Value Index aligns with its growth trajectory and undervalued status. While near-term volatility (e.g., a 16% swing in May) demands caution, the following factors justify a long-term bullish stance:1. Passive inflows: The Russell reconstitution typically boosts liquidity and visibility for new members.2. Operational turnaround: Margin improvements and LTL dominance suggest XPO is nearing a valuation inflection point.3. Debt management: Buybacks and synergy realization could stabilize leverage by 2026.

Actionable advice: Consider accumulating XPO around $70–$75, with a 12-month price target of $90–$100. Monitor Q3 earnings for margin resilience and debt metrics. Avoid chasing rallies above $85 unless the stock's price-to-EBITDA multiple narrows to industry norms.

In conclusion, XPO's Russell inclusion and Yellow-driven turnaround create a compelling risk-reward profile. While debt remains a speed bump, the logistics leader's growth and undervaluation make it a prime candidate for patient investors.