FDX misses top line expectations; Announces spin off of LTL biz
2min read FedEx reported fiscal second-quarter adjusted earnings per share (EPS) of $4.05, slightly ahead of consensus estimates of $3.98, with revenue of $22 billion falling marginally short of the $22.15 billion expected by analysts. The results reflect cost savings in its Express business offsetting some margin compression in the Freight segment. However, FedEx lowered its fiscal 2025 EPS guidance to a range of $19.00-$20.00 from the previous $20.00-$21.00, citing ongoing demand pressures and macroeconomic uncertainty. Revenue guidance was also revised to flat year-over-year, compared to an earlier outlook of low-single-digit growth.
The key highlight of the announcement was FedEx's decision to spin off its less-than-truckload (LTL) Freight business into a standalone public company within the next 18 months. The move aims to unlock significant value by addressing the undervaluation of its LTL segment compared to peers like XPO and Old Dominion, whose valuations are nearly double that of FedEx Freight. Analysts widely praised the decision, seeing it as an opportunity for both the Freight and core delivery businesses to benefit from greater strategic and operational focus.
The spin-off is expected to create the largest pure-play LTL company in North America by revenue, drawing attention to the Freight division's strong market position. Analysts highlighted that the separation would allow for more tailored investment and capital allocation strategies for each business. Additionally, the move is expected to improve service and pricing within the Freight segment as it operates independently, attracting greater scrutiny and fostering growth opportunities.
Analysts reacted enthusiastically to the spin-off, with several raising their price targets on FedEx stock. Loop Capital upgraded the stock to "Buy" and increased its price target from $288 to $365, citing the value-creating potential of the spin-off. UBS echoed these sentiments, raising its target from $311 to $350, while Stifel and Barclays also increased their targets to $368 and $365, respectively. Analysts emphasized that the decision would drive medium-term shareholder value and provide immediate support to the stock.
Shares of FedEx surged more than 8% in after-hours trading following the announcement, reflecting investor optimism about the spin-off's potential to unlock value. Analysts noted that the move addresses longstanding concerns about the Freight business's contribution to FedEx's overall valuation. Despite the lowered guidance for fiscal 2025, the spin-off news overshadowed concerns about near-term headwinds, bolstering market sentiment.
FedEx Freight's underperformance in the quarter, attributed to sustained weakness in U.S. industrial production, weighed on overall results. However, the Express segment demonstrated resilience with operating profit growth despite weak domestic demand and the expiration of a contract with the U.S. Postal Service. FedEx reaffirmed its commitment to $2.2 billion in permanent cost savings under its DRIVE program and maintained a capital expenditure forecast of $5.2 billion.
The company’s forward outlook remains cautious, with CEO Raj Subramaniam highlighting the challenging macroeconomic environment but expressing confidence in the strategic benefits of the separation. FedEx expects revenue growth to remain constrained through fiscal 2025, though management remains optimistic about leveraging structural cost reductions to position the business for future recovery.
In summary, FedEx's Q2 results delivered a modest beat on EPS but were overshadowed by the game-changing decision to spin off its Freight segment. Analysts and investors view the separation as a significant value unlock, drawing comparisons to higher-valued industry peers. With a renewed focus on core delivery operations and the Freight business poised for independent growth, FedEx's transformation strategy is being welcomed as a pivotal step for long-term shareholder value.