By Abhijith Ganapavaram
(Reuters) -FedEx's decision to spin off its freight trucking unit will strengthen that business while allowing the parcel delivery giant to better tackle challenges in its core operations, analysts said on Friday.
FedEx (NYSE:FDX) shares eked out a less than 1% gain in early-afternoon trading on Friday after the bellwether for global trade also reduced annual profit forecast late on Thursday.
FedEx Freight, the largest U.S. provider of less-than-truckload (LTL) services, could be valued between $30 billion and $35 billion, Citi estimated.
"The decision to proceed with a full separation of the LTL segment has the potential to unlock significant value and is a welcomed holiday gift to FDX shareholders," BMO Capital Markets analyst Fadi Chamoun wrote in a note on Friday.
Analysts have long argued that Freight was undervalued within FedEx, which has been slashing expenses and consolidating its express and ground operations to more profitably compete with delivery rivals like United Parcel Service (NYSE:UPS).
FedEx disclosed in June it was weighing options for the LTL business, which involves carrying multiple shipments from different customers on a single truck.
The spin-off will be completed within 18 months, which some analysts say will allow FedEx to cut risks and separate the business when freight demand is favorable. The resulting public company will also be the only one of its kind to offer priority service, analysts said.
The separation will allow FedEx to sharpen its focus on addressing the impact of soft industrial shipping demand and a shift away from higher-priced deliveries among customers.
FedEx also faces a $500 million hit from the loss of the United States Postal Service, its largest customer, earlier this year.
FedEx shares were up 9.1% year-to-date as of Thursday, underperforming the S&P 500 index but better than rival UPS' 22% slump.
LTL MARKET TO BENEFIT
FedEx Freight had revenue of $9.4 billion in fiscal 2024. Some of its competitors in the U.S. include XPO Inc and Old Dominion.
"We believe FXF's (FedEx Freight's) investment in sales, service, and margin during the transition will be positive for the broader LTL industry," J.P. Morgan analyst Brian Ossenbeck said.
FedEx said it has started building out a dedicated sales force for the business and expects to add over 300 specialists by the time of separation.
As part of FedEx, Freight is trading at 13 times forward estimates, Edward Jones analyst Faisal Hersi said. "If you look at some of the LTL peers, they trade north of 20 times."
"The Freight spin-off is a clear win for FDX shareholders on the valuation arbitrage opportunity alone," Susquehanna Financial Group analyst Bascome Majors said.