FedEx is conducting a strategic analysis of its less-than-truckload unit and its relative value to the company, suggesting it may sell or spin off FedEx Freight to allow it to focus on its package and logistics business.
“With the recent completion of our fiscal 2025 planning process, we have shifted our focus to the next phase of our long-term shareholder value creation plan. As part of this work, our management team and board of directors, along with external advisors, are evaluating FedEx Freight’s role in our portfolio structure and potential steps to further enhance sustainable shareholder value,” CEO and President Raj Subramaniam said Tuesday during a conference call with analysts after the company released its fourth-quarter earnings. “We are committed to completing this review thoroughly and thoughtfully by the end of the calendar year.”
FedEx Freight is the company’s (NYSE:FDX) best-performing division, with ground margins of 11.8% and express margins of 2% in 2023, compared with 20% operating margins in each of the past two years. In the fourth quarter, operating profit increased by $58 million as a focus on revenue quality and cost control helped the company overcome weak demand and improved margins.
FedEx Freight is the nation’s largest LTL carrier and is highly efficient, with an 80% utilization rate, second only to Old Dominion Freight Line (ODFL).
Satish Jindel, founder and president of package-shipping consultancy ShipMatrix, predicted in an interview that FedEx will spin off its cargo subsidiary.
He argued that the best option for maximizing shareholder value would be to work with FedEx Freight, the nation’s largest LTL shipper, to create a separate company and issue shares to current investors.
“A public market spinoff rather than a sale would provide greater returns to shareholders,” he said, because the second-largest shippers, ODFL and Saia, don’t need FedEx Freight and it’s too expensive for someone else to acquire.
About three years ago, Mr. Zindel wrote an open letter to FedEx founder Fred Smith urging him to spin off the freight division into a separate company because FedEx’s overall market capitalization is $61 billion, compared with $34 billion.
FedEx Freight’s revenue has nearly doubled since then, to nearly $19 billion, and its market cap is now more than $50 billion, making a spinoff even more sense.
“There’s no carrier big enough to buy FedEx Freight,” he said, denying speculation that another big LTL carrier, XPO, was bidding to buy the FedEx unit. “And you can’t combine the two carriers,” because LTL networks are asset-intensive and would create a lot of redundancy in terminals.
“There aren’t enough options on the public markets, which is why more people are buying shares of Saia, ODFL and XPO. The moment there’s a fourth carrier option, they’ll put their money there,” Zindel told FreightWaves.
The other big LTL company is ABF Freight System, but its LTL business is now less than half its size due to its expansion into household goods transportation and third-party logistics.
Stifel analyst Bruce Chang also said a spinoff of the cargo unit was the most likely outcome. “The cargo division has quietly grown from a family outcast to the most profitable part of the portfolio, and such a move would make sense given that peers are valued at nearly double FedEx’s,” he wrote in a research note.
The market responded favorably to the outlook for cargo trading and improving margins. FedEx shares rose about 14.5% from Tuesday’s closing price to $293 in midday trading.
FedEx shares could be valued at $310 to $338 per share if Freight is sold this fiscal year, and could rise to as much as $408 per share in fiscal 2026 if the deal closes, Fadi Chamoun, an analyst at BMO Capital Markets, said in a client note.
FedEx rival UPS (NYSE: UPS) sold its LTL division to Canada-based trucking company TFI International in 2021.
In related news, FedEx has completed the integration of Express, Ground and Freight, combining its air and ground networks into one. Subramaniam said financial results will be reported in the Express and Freight divisions going forward, with Ground being absorbed into the Express organization. FedEx Freight will now include FedEx Custom Critical, a premium service that was previously included in the Express organization.
For more FreightWaves/American Shipper articles by Eric Kulisch, click here.
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