The leaders of FedEx have launched a review of the company’s less-than-truckload operations, a move they say is part of “the next phase of […] long-term stockholder value-creation plans” and which analysts expect to end with a spinoff of the business.
FedEx Freight produced an operating profit of $1.8 billion on revenues of $9.1 billion in the company’s just-completed fiscal year. Both numbers were down 6% from fiscal 2023 but have been trending in the right direction of late: During FedEx’s fourth fiscal quarter, operating income climbed 13% from the prior-year period to $506 million, and revenues ticked up 2% to $2.3 billion.
FedEx operates the largest for-hire trucking fleet in the U.S., with more than 155,000 power units. It ranks No. 1 on the FleetOwner 500: For-Hire list.
Speaking to analysts June 25, president and CEO Raj Subramaniam said he expects his team to complete its study by the end of 2024 but was pretty tight-lipped beyond that. But when asked what has changed since a recent investment bank conference where Subramaniam talked broadly about further integrating FedEx Freight with other parts of the company’s portfolio, he cracked the door a bit about why a separation might be in the works.
“We’ve heard from several investors and analysts in this regard and, obviously, we take input from our shareholders very, very seriously,” he said before adding that “this is the right time in our natural planning calendar.”
Timing could also be an important factor as it relates to current transportation-company valuations, two analysts said in the wake of FedEx’s news. Both Bruce Chan at Stifel and Tom Wadewitz at UBS pointed out that investors value non-union LTL carriers similar to FedEx Freight much more highly than FedEx as a whole. Chan said the ratio is nearly 2-to-1.
“The LTL division has grown to become the darling of the purple portfolio,” Chan wrote in a note to investors that touched on the valuation disparity. “As such, a divestiture seems prudent, in our eyes, and offers a tantalizing opportunity for investors.”
Handling an average of 93,100 shipments per day in the three months ended May 31, FedEx Freight is about 80% larger than XPO Logistics Inc.’s LTL business and roughly double the size of Old Dominion Freight Line’s LTL unit. In FedEx’s fourth-quarter earnings report—highlighted by net income of more than $4.3 billion on total revenues of $87.7 billion—Subramaniam and his team said higher yields and some cost management have helped lift the division’s numbers. Among the moves made in the cost-cutting category are the closings of seven facilities now underway.
Word of the potential divestment of FedEx Freight and progress with broader restructuring initiatives helped shares of FedEx (Ticker: FDX) pop more than 15% to $296 and change on June 26. That’s the stock’s highest level since mid-2021, and the company’s market capitalization is now nearly $73 billion.
