FedEx shares paced Wednesday toward one of the biggest gains in the delivery giant’s 46 years as a public company, after FedEx’s quarterly earnings report brought investors the whole package.
FedEx Freight, the parcel giant's highly profitable less-than-truckload division, could be spin off ... [+]
FedEx’s stock rose 13% shortly after market open, which would be the parcel giant’s biggest rally since June 2022 and its fifth-best daily percentage gain since going public.
The stock’s $293 intraday Wednesday peak marks FedEx’s highest share price since July 2021.
The surge came after the company’s Tuesday afternoon earnings included several morsels impressing Wall Street, including modest beats on analyst estimates for quarterly revenue and profit, as well as earnings guidance for its fiscal year beginning last month that was similarly a tick above consensus forecasts.
But FedEx’s announcement it is evaluating options for its freight unit is the “big news” driving the renewed investor optimism, according to Stifel analysts led by J. Bruce Chan, while JPMorgan analysts upgraded their recommendation for FedEx shares from a hold to a buy due to the “surprising step” of a potential spinoff of its highly profitable freight arm.
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The potential for a spinoff of FedEx’s lower-load road deliveries, or less-than-truckload, division is enticing for investors considering the unit’s higher margins. Last fiscal year, freight brought in $1.8 billion of operating income on $9.1 billion of revenue, compared to $1.1 billion of operating profit on $40.9 billion of sales in FedEx’s bread-and-butter Express cargo air unit, and freight has grown from account for 9% of FedEx’s operating profit in 2014 to 29% last year. An independently traded FedEx freight stock would probably fetch a higher relative valuation compared to earnings—Stifel noted top less-than-truckload stocks are trading at twice as expensive a price-to-earnings valuation as FedEx’s —and thus generate stronger shareholder returns.
After declining more than 50% from its 2021 record high to its Sept. 2022 nadir, FedEx stock has mounted a steady comeback as the company heavily emphasized cost-cutting initiatives. Still, the company’s financial performance remains depressed, with last quarter’s $5.41 earnings per share a significant decline from the comparable 2022 period’s $6.87. FedEx has far outperformed rival UPS on the stock market this year, with FedEx stock’s 15% year-to-date gain dwarfing UPS’ 15% loss.