Trucking Experts Project Spinoff of FedEx’s Freight Business
Transportation analysts and experts expect FedEx to spin off its Freight unit as a separate publicly traded company, potentially bringing a windfall to shareholders while providing a boost to other competitors in the carrier’s wing of the trucking sector.
FedEx Freight, which generated $9 billion in revenue in the 12 months ending May 31, is by far the largest operator in the less-than-truckload sector, making a sale of the business “less likely in our eyes,” Daniel Imbro of financial services firm Stephens wrote in a research note Wednesday.
Satish Jindel, president of SJ Consulting, an industry data group and consulting firm, said a spinoff would likely draw “a market capitalization of $50 billion by itself,” based on the strong performance of FedEx’s rivals in the LTL business, in which shipments from multiple companies are combined on a single truck.
“LTL is a darling on Wall Street right now,” he said.
FedEx said in releasing its earnings on Tuesday that it was “conducting an assessment of the role of FedEx Freight in the company’s portfolio structure and potential steps to further unlock sustainable shareholder value.”
The company didn’t detail the alternatives it was considering, but said it plans to complete the review by the end of this year.
The review comes as FedEx is reorganizing operations under what it calls its Drive transformation. The effort to eliminate the barriers between the Express and Ground operations, a plan that analysts and activist investor D.E. Shaw had been calling for, may leave the trucking business on the outside while pickup and delivery, sorting and other parcel services are blended.
A carve-out or sale would effectively end efforts FedEx and rival United Parcel Service have undertaken over several years to bring parcel business and trucking operations under the same umbrella, moves that included several multibillion-dollar acquisitions.
UPS sold its trucking business in 2021 and this month sold its freight brokerage division, part of Chief Executive Carol Tomé’s plan to focus more tightly on handling parcels more efficiently.
Jindel said the potential gains from combining the trucking and parcel businesses for customers have eroded as e-commerce has changed the market.
“With Amazon coming into the market and other large retailers doing more of their own package delivery, the average daily volume that is available to FedEx and UPS has gotten smaller,” he said. “There used to be more barriers to entry to being a parcel carrier than there were to getting into LTL. That is no longer the case.”
Market capitalization measures for other competitors in the business have surged as LTL carriers have defied a broader downturn in trucking demand.
Old Dominion Freight Line, the second-largest LTL carrier by revenue, had a market cap of $38.7 billion as of Wednesday with about $5.8 billion in revenue. No. 3 XPO had a market cap of $12.2 billion with less than $4.7 billion in LTL revenue last year while Saia’s market cap of $12.4 billion came after revenue of about $2.9 billion last year.
FedEx carries a richer $72.5 billion market capitalization, but that comes with overall revenue of $87.7 billion that the company reported in its fiscal year that ended May 31. The Freight trucking operation generated $9.1 billion in revenue during the 12-month period., and its operating margin in the last three months hit a lofty 21.9%.
Brian P. Ossenbeck, an analyst at J.P. Morgan Securities wrote in a research note that there was a “valuation disconnect” from having FedEx Freight embedded with the parcel operations. “At one point in September 2022, ODFL’s market cap was 75% of the entirety of FDX,” he wrote.
Carving away FedEx Freight would also lift the rest of the sector, he wrote, “as the largest player becomes a stand-alone entity without the overhang of bundling” the business with Express and Ground, “which provides the opportunity to bring rates higher than they are now.”
FedEx shares rose 15.5% in trading Wednesday to $296.19, the largest percentage increase in the company’s stock since Sept. 29, 1986.
Esther Fung contributed to this article.
Write to Paul Page at [email protected]