FedEx Cuts Profit Outlook but Shares Still Jump 7%

FedEx (NYSE:FDX) announced it will spin off its freight trucking division to sharpen its focus on core delivery services. The move sent shares up 7% in premarket trading, adding $5 billion to its market cap. Analysts say the spinoff could unlock up to $20 billion in shareholder value.

The newly independent FedEx Freight is the largest U.S. provider of less-than-truckload (LTL) services, which combine shipments from multiple customers on a single truck. Analysts say this business was undervalued within FedEx but could thrive as a stand-alone company. Comparisons were drawn to trucking rivals like XPO and Old Dominion, which trade at higher valuations.

“We are encouraged that the company listened to shareholder feedback,” said Daniel Imbro, an analyst at Stephens.

However, the freight unit faces challenges. Revenue for the second quarter fell 11% to $2.17 billion. Management blamed the drop on losing cost-sensitive customers after rival Yellow Corp's bankruptcy. But FedEx noted that demand has since stabilized.

For FedEx as a whole, adjusted second-quarter profit was $4.05 per share, beating Wall Street's $3.90 estimate. However, revenue from the Express unit, which handles time-sensitive international deliveries, was hit by higher wage costs, weak U.S. package demand, and the end of its contract with the U.S. Postal Service (USPS). This contract loss is expected to create a $500 million headwind for the fiscal year.

FedEx has lowered its full-year profit forecast, now expecting earnings of $19 to $20 per share, down from its prior range of $20 to $22. Management cited a "stubbornly challenging" economic environment with slower demand from business customers.

Despite these headwinds, the holiday shipping season is offering a boost. Daily volumes spiked after Cyber Monday, and FedEx says shipments are outpacing forecasts. Carriers still have excess capacity from the COVID-era shipping boom, so most holiday gifts are expected to arrive on time.

Investors see the freight spinoff as a chance for FedEx to simplify its business and increase profitability. By focusing on its core delivery units and shedding its LTL trucking business, FedEx aims to drive efficiency and better compete with UPS.