FedEx Corp. shares soared after the company said it plans to spin off its freight division into a separate publicly traded company in a deal that will streamline the parcel giant.
With revenue of $9.4 billion in 2023, FedEx Freight will become the largest player by sales in an industry that specializes in carrying shipments from multiple customers on a single truck. FedEx said December 19 that it will separate the unit, which Bloomberg Intelligence estimates has an enterprise value of more than $30 billion, within the next 18 months.
Chief executive officer Raj Subramaniam said the move will help both companies "benefit from enhanced focus and competitiveness," on a conference call with analysts. Shedding the freight unit will allow FedEx to concentrate on fixing its core business. It could also boost the company's underwhelming stock performance by capitalizing on rising valuations of stand-alone trucking companies whose shares have outpaced the broader market since 2019.
The stock rose 4.9% at 9:34 a.m. New York on December 20, as investors salivated at the prospect of FedEx spinning off a new rival to trucking companies Old Dominion Freight Line Inc. and XPO Inc. FedEx shares had gained 9% this year through December 19's close, lagging a 23% advance by the S&P 500 Index.
Evercore ISI said the spinoff will unlock value in the freight business. FedEx is worth $329 a share if you add up its parts, about 10% higher than where the stock is trading now, analyst Jonathan Chappell said in a research note.
Loop Capital analyst Rick Paterson upgraded FedEx from hold to buy and raised the price target from $288 to $365 on the spinoff news. "There's still an element of uncertainty regarding corporate overhead costs at FedEx Freight, but the back of the envelope math is still fairly compelling," Paterson wrote to clients.
The two companies will maintain commercial agreements and continue to work together. FedEx in June 2023 said it was reviewing the freight business, fueling expectations that it could be spun off or sold. Goldman Sachs & Co. LLC is serving as the financial adviser to FedEx while Skadden, Arps, Slate, Meagher & Flom LLP is providing legal counsel.
Tepid Demand
The widely anticipated transaction was announced as the company trimmed its full-year profit forecast, highlighting how FedEx's main businesses continue to struggle with weak demand, especially in the U.S. at its Express unit.
Adjusted earnings in its 2025 fiscal year will be $19 to $20 a share, below FedEx's previous forecast for $20 to $21 a share, the company said in a separate statement announcing fiscal second-quarter earnings that topped Wall Street estimates. The midpoint of the new range is roughly in line with the $19.48 average of analyst estimates compiled by Bloomberg.Second-quarter adjusted profit was $4.05 a share, compared with the $3.98 average of analyst estimates compiled by Bloomberg. The company attributed the second quarter profit beat to continued savings from its efficiency initiative, which it said counteracted lower-than-expected freight revenue.
The gloomier outlook shows how FedEx's core businesses continue to wrestle with sputtering package demand that's hit the entire industry as cash-strapped customers choose slower, cheaper delivery options instead of more profitable express shipping. Sluggish demand from the industrial sector is also hurting sales of FedEx's most profitable services, chief financial officer John Dietrich said on the call.
The trucking industry is still trying to recover from a prolonged freight recession brought on by an excess of capacity that entered the market during the pandemic, when heightened consumer demand for deliveries caused rates to skyrocket.
Subramaniam is trying to shore up the company to better contend with the weakened demand by combining the company's Express unit that ships parcels by air with its Ground delivery network.
He's also vying to recover lost business stemming from the expiration of its contract with the U.S. Postal Service, which FedEx said would continue to weigh on volume in upcoming quarters. The agency shifted its air cargo to rival United Parcel Service Inc. To accommodate for the loss in volume, FedEx reduced its daytime flight hours by 60%.