Al Root
FedEx reported better-than-expected earnings on Thursday night, but that isn't why the stock is soaring on Friday morning.
FedEx management told investors it would separate its freight division from the rest of the business, leaving investors with two publicly traded companies. The separation, which could be a spinoff or initial public offering, will take about 18 months to complete, according to the company.
Investors seem to be pleased. FedEx stock was up 7.5% in premarket trading at $296.50, while futures on the S&P 500 and Dow Jones Industrial Average were down 1% and 0.6%, respectively.
Wall Street is happy too. After the earnings, at least five analysts raised their targets for the stock price. The average move was about $29, or roughly 10% of the current price.
Loop Capital analyst Rick Paterson led the way, upgrading shares to Buy from Hold. His price target went to $365 a share from $288, for a gain of $77. Paterson called the move "value-creating" in a research note.
It isn't hard to see why. The freight business delivers less-than-truckload service, which is what it sounds like. It operates trucks that aren't full and typically travel shorter distances for industrial customers.
Old Dominion Freight Line is a large, less-than-truckload service provider. It trades for about 34 times the earnings per share expected for calendar 2025. FedEx stock trades for about 13 times.
In the first half of fiscal 2025, FedEx Freight generated sales of $4.5 billion, roughly 10% of total sales. Freight sales fell about 7% year over year. Operating income was $751 million, down about 23% year over year.
Sales and earnings are falling because the overall economy is sluggish. FedEx expects fiscal year 2025 sales to be flat with 2024.
Overall, FedEx expects to earn roughly $19.50 a share, up from $17.80 in fiscal 2024. Cost savings are responsible for much of the improvement.
"FedEx's decision to spin off its Freight division underscores a visionary approach to streamline operations and harness core efficiencies," says Jim Osman, founder of the special-situations research firm The Edge, adding that FedEx has worked to integrate elements of its freight and express networks to enhance efficiency "This bold move will likely enhance operational agility and financial health, setting a new standard in the logistics industry."
Osman said corporate actions like this make sense when economic times are tough. When the economy isn't making business easy, it is a good idea for companies to focus on what they can control.
Osman doesn't have a price target or rating for FedEx stock. Overall, 64% of analysts covering FedEx rate the shares at Buy, according to FactSet. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. The average analyst price target is about $325 a share, up about $14 after the earnings report.
Coming into Friday trading, FedEx stock was up about 9% year to date.
Write to Al Root at allen.root@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 20, 2024 08:42 ET (13:42 GMT)
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