FedEx announced the highly anticipated spinoff of its freight trucking division, aiming to streamline operations and prioritize its core delivery business. This strategic move, announced on Thursday, sent FedEx shares soaring 7% in premarket trading, adding a significant $5 billion to the company’s market capitalization.
Analysts project that this spinoff could unlock substantial shareholder value, potentially reaching up to $20 billion. By separating the freight division, FedEx management can concentrate on merging its Express and Ground units, a move expected to significantly boost profitability. The prevailing view is that FedEx Freight assets were undervalued within the larger FedEx structure, and establishing the trucking business as an independent, publicly traded entity will create opportunities for expansion and operational enhancements.
Edward Jones analyst Faisal Hersi highlighted the profitability of the Freight division, noting that FedEx currently trades at a discount compared to publicly traded trucking competitors like XPO and Old Dominion. This spinoff, Hersi suggests, presents an opportunity to rectify this undervaluation and generate significant returns for investors. Daniel Imbro, an analyst at Stephens, echoed this sentiment, stating that the decision to spin off the Freight division demonstrates that FedEx is responsive to shareholder input.
FedEx Freight holds a leading position as the largest U.S. provider of less-than-truckload (LTL) services. LTL shipping involves consolidating multiple shipments from various customers onto a single truck, which are then routed through a network of service centers for efficient transfer to other trucks destined for similar locations. Despite its market dominance, the unit experienced an 11% revenue decline to $2.17 billion in the fiscal second quarter ending November 30th.
FedEx executives attributed the recent revenue dip in the Freight division to the loss of some cost-conscious customers acquired after the bankruptcy of competitor Yellow Corp. However, they expressed optimism that the business had reached its lowest point in the recent quarter and is poised for recovery.
Despite the positive market reaction to the spinoff announcement, FedEx cautioned that revenue in 2025 might be impacted by persistent economic challenges, with demand for its premium, high-speed delivery services from business clients remaining subdued. Consequently, the Memphis-based company adjusted its profit forecast for the fiscal year ending May 2025, projecting adjusted earnings per share between $19 and $20, down from the previous estimate of $20 to $22 per share.
In the second quarter, FedEx reported adjusted profit of $0.99 billion, or $4.05 per share, compared to $1.01 billion, or $3.99 per share, in the same period last year. Despite the year-over-year decline, the results surpassed analysts’ average earnings estimate of $3.90 per share, according to LSEG.
FedEx Freight’s revenue and profit fell short of expectations in the latest quarter due to ongoing weakness in the U.S. industrial sector, encompassing manufacturing, metals, and chemicals. However, these negative impacts were largely mitigated by the company’s ongoing cost-cutting initiatives, focused on reducing overhead and enhancing operational efficiency. Performance in the Express unit saw improvement, driven by expense reductions and increased international export volume, partially offset by higher wage and lease costs, weak domestic package demand, and the termination of the U.S. Postal Service air transportation contract on September 29, 2024.
FedEx reiterated its previous warning that the loss of the USPS contract, its largest customer, would pose a $500 million challenge in the current fiscal year. Both FedEx and its competitor, United Parcel Service (UPS), are currently navigating the peak holiday shipping season, a period characterized by a significant surge in daily volumes.
This year’s later-than-usual Thanksgiving holiday compressed the delivery window for holiday gifts and retail inventory. Despite this challenge, December volumes have thus far exceeded FedEx’s projections, showing a marked increase following Cyber Monday, a major online shopping day. While carriers are grappling with excess capacity stemming from the early COVID shipping surge, experts predict that the majority of holiday shipments will arrive on time. The strategic spinoff of the Freight division positions FedEx to optimize its operations and adapt to evolving market dynamics in the long term.
