On Dec. 19, 2024, FedEx Corporation FDX reported mixed results for the second quarter of fiscal 2025 (ended Nov. 30), after market close. While the transportation heavyweight reported better-than-expected earnings per share, revenues lagged the Zacks Consensus Estimate.

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More than the financial numbers, what caught the attention of market watchers was the company’s announcement of plans to spin off the FedEx Freight unit to create two publicly traded companies.

Highlights of FDX’s Q2 Earnings

FDX’s second quarter of fiscal 2025 earnings (excluding $1.02 from non-recurring items) of $4.05 per share beat the Zacks Consensus Estimate of $3.90 and improved 1.5% year over year. Revenues of $21.9 billion fell short of the Zacks Consensus Estimate of $22 billion and fell 0.8% from the year-ago fiscal quarter’s reported figure.

Quarterly results were hurt by the double-digit decline in revenues from the company’s freight unit. Segmental revenues fell 11% from the year-ago fiscal quarter’s reported figure to $2.2 billion. FedEx Freight segment was hurt by fewer shipments, lower fuel surcharges and reduced weight per shipment.

Revenues from the Express unit also dropped year over year. Average daily shipments fell 8% year over year. During the fiscal second quarter, FDX repurchased shares worth $1 billion.

FDX also revised fiscal 2025 earnings and revenue forecasts. It now expects revenues to be flat year over year compared with the prior view of low single-digit percentage growth. The company also predicts adjusted earnings per share of $19-$20 compared with the prior forecast of $20.00-$21.00.

Due to weak shipping demand, earnings estimates have moved south for FDX stock.

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FDX Intends to Separate Its Freight Unit

Apart from announcing earnings results, FedEx’s board of directors announced the decision to separate its freight unit in the process creating a new publicly traded company. The spin-off will enable FDX to focus on its core business. The separation process, expected to commence immediately, will be executed within the next 18 months, subject to regulatory and certain other conditions and final approval of FDX’s board.

The split is expected to preserve commercial and operational synergies between both companies. Both companies will pursue their growth strategies and will maintain the strategic advantages of cooperation on key commercial, operational and technology initiatives. Customers of both businesses will continue to enjoy the same superior service, speed and coverage as before.

After the spin-off, FedEx Freight will retain its name. FedEx Freight is expected to benefit from a strong balance sheet that will allow it to maintain and extend the company leadership position in the less-than-truckload market.

The decision to spin off the freight unit found favor with investors with the stock gaining significantly post the announcement.

FDX’s Fundamental Strength

For long-term investors, a single quarter’s results are not so important. They would rather base their investment decision on the underlying fundamentals. FDX scores impressively on that front, driven by its strong operating model.

FDX’s endeavors to expand into its operations are commendable. Prudent investments enable FDX to extend services and solidify its comprehensive offerings. To combat the demand weakness, FDX is focused on the reduction of structural costs through its DRIVE program initiatives.

DRIVE initiatives are expected to result in savings worth $4 billion by fiscal 2025  The company has implemented significant new pricing actions relating to both demand and fuel surcharges, whose benefits can be seen in the coming quarters. These cost-reduction initiatives include reducing flight frequencies, parking aircraft and cutting staff.

The company’s efforts to reward its shareholders are commendable. In June 2024, FedEx raised its quarterly dividend by 10% to $1.38 per share (or $5.52 annually). Dividend stocks like FDX are generally safe bets for creating wealth, as these payouts act as a hedge against economic uncertainty. FDX is also active on the buyback front.

Despite near-term challenges, it is worth noting that the company has the brand and the network to continue generating steady cash flows in the long run.

Impressive Price Performance of FDX Stock

Driven by its cost-cut initiatives, FDX’s shares have performed well over the past year gaining in double-digits. FDX’s shares outperformed not only its industry but also rival United Parcel Service UPS in the same timeframe.  Another industry player, Air Transport Services Group ATSG has performed better.

One-Year Price Comparison

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Valuation Picture Attractive: An Added Tailwind for FDX

Going by the forward 12-month price/earnings ratio, the company’s shares currently trade at levels lower than its industry. FDX currently has a Value Score of A.

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To Sum Up

There is no doubt that the stock is attractively valued and shareholder-friendly initiatives attest to FDX’s financial bliss. Despite the optimism surrounding the announcement of the spin-off of FDX’s freight division, we note that since the process is likely to take 18 months for completion any near-term impact of the transaction on the stock is ruled out. No clarity is available on how the financials of the independent entity will shape up or look like.

Other headwinds like below-par shipping demand also lead us to believe that it is not at all advisable to buy this Zacks Rank #3 (Hold) stock currently. Declining earnings estimates also do not help matters. Investors should monitor the company’s developments closely for an appropriate entry point. For those who already own the stock, it will be prudent to stay invested. The stock’s current Zacks Rank supports our thesis.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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United Parcel Service, Inc. (UPS) : Free Stock Analysis Report

FedEx Corporation (FDX) : Free Stock Analysis Report

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