Why XPO Logistics Stock Dropped 10%

What happened

Shares of XPO Logistics (NYSE: XPO) closed with a 9.6% drop on Tuesday, after the trucking and logistics company issued an earnings warning by way of an 8-K filing with the SEC. In this filing, XPO disclosed that while it "remains on track to generate approximately $625 million of free cash flow for 2018, and expects to generate approximately $650 million of free cash flow for 2019" as well, the company anticipates growing its adjusted EBITDA only 12%-15% year over year in 2019.

So what

So double-digit growth is a bad thing now? Well, apparently so -- because just a little over a month ago, XPO CEO Brad Jacobs had told investors to expect something closer to 15% to 18% adjusted EBITDA growth. Today's update, therefore, suggests XPO will fall short of even the low end of its previous estimate, potentially far short.

On top of that, the other measure of profitability discussed in today's filing, free cash flow, shows XPO targeting only 4% FCF growth next year, which implies that growth, which is already slower than management had been promising, will slow further in the new year.

Now what

Some investors may be tempted to view today's sell-off as a buying opportunity -- but beware. Up till now, buyers of XPO stock have probably been depending on analyst predictions of 40% annualized profits growth at XPO. They're going to be sorely disappointed if the best XPO can produce for the next year or so is 15%, 12%, or just 4% growth.

Today's big sell-off may be only the beginning of a longer-run downturn for XPO Logistics stock.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends XPO Logistics. The Motley Fool has a disclosure policy.