Investors cheer 10% FedEx stock surge after bold freight move

FedEx (FDX) announced a significant strategic move to spin off its freight business into a separate public entity. The decision follows the release of mixed Q2 earnings, where adjusted EPS reached $4.05, slightly outpacing analyst expectations of $4.01. Revenue, however, fell about 1% to $22 billion, compared to the $22.14 billion consensus forecast.

The company’s fiscal second-quarter results reveal ongoing economic pressures. FedEx’s revenue decline aligns with the weak industrial economy, which has also affected its operational profitability. Despite a sequential increase of approximately $170 million in adjusted operating profit, the overall revenues have faced significant headwinds. Chief Executive Raj Subramaniam noted that while the Federal Express segment successfully delivered operating profit growth, the company grapples with challenges such as the expiration of its contract with the U.S. Postal Service and a notably soft domestic demand environment.

FedEx’s initiatives to reduce costs are a focal point, with a target of achieving $4 billion in savings by the end of FY2025. The company reported that it achieved $540 million in cost savings during Q2, as part of a broader strategy to streamline operations through combining various delivery modes into a single operational structure.

Furthermore, FedEx has revised its fiscal 2025 forecasts, now projecting adjusted EPS between $19.00 and $20.00, reduced from the prior estimate of $20.00 to $21.00. This revision reflects ongoing challenges within the industrial sector and an increase in competitive pressure, particularly affecting FedEx Freight’s operating profit, which saw a decline of $179 million, partly attributed to a decrease in daily shipments and fuel surcharges.

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In the aftermath of these announcements, FedEx’s stock surged nearly 10% after market close, rising to approximately $275.84 during regular trading—marking an overall decline of around 9% in December alone. Analysts, such as Morgan Stanley’s Ravi Shanker, previously indicated that FedEx’s performance rebound was crucial following a disappointing first quarter. In contrast, FedEx stock has outperformed its primary competitor, United Parcel Service (UPS), advancing approximately 8% year-to-date compared to UPS’s decline of more than 20%.

The decision to spin off FedEx Freight into a separate public company is also anticipated to create significant value for shareholders. Over the past five years, FedEx Freight has maintained its competitive edge in market share and has averaged nearly 25% annual growth in operating profit. The separation is designed to enhance operational focus, allowing both entities to streamline their respective businesses.

Internationally, FedEx has reported a 9% increase in export package volumes during the quarter, and the company is making strides in returning capital to shareholders, completing $1 billion in share repurchases during Q2, totaling $2 billion for the year to date. Despite these positive indicators, the pricing environment remains strained, and the future economic landscape appears uncertain.

The ongoing industrial challenges and lower average daily shipments, alongside the expiration of the USPS contract, continue to pose risks. FedEx’s management remains committed to optimizing operations and capital allocation strategies, and the upcoming quarters will be crucial for regaining stability within its revenue streams and profit margins.

While December volumes exceed forecasts and peak surcharge capture indicators suggest positive trends, the company does not expect this performance momentum to sustain throughout the latter half of the fiscal year.

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Featured image credit: FedEx