FedEx (FDX, Financial) reported mixed Q2 earnings with modest EPS gains but slightly lower revenues. The company lowered its FY25 adjusted EPS guidance to $19.00-20.00 and expects flat revenue due to a subdued demand environment. Significantly, FedEx plans to fully separate its FedEx Freight segment into a new publicly traded company within 18 months.
- Revenue fell 0.9% year-over-year to $21.97 billion, affected by a sluggish global industrial economy and competitive pricing. The expiration of a Postal Service contract on September 29 also impacted the quarter. FedEx highlighted that US manufacturing PMI has contracted for 24 of the last 25 months, marking a prolonged downturn.
- Revenue at the Federal Express unit remained stable at $18.84 billion, with increased demand for lower-yield services. FedEx Freight segment revenue dropped 11% year-over-year to $2.18 billion, influenced by a weak industrial economy, lower volumes, reduced fuel surcharges, and decreased weight per shipment. Comparisons were tough due to customer losses after the Yellow bankruptcy.
- Volume trends showed pressure, especially in the US domestic market, partially offset by international growth. US domestic express service volumes fell 1%, mainly due to industrial weakness, while ground volumes also declined 1%, affected by a sluggish B2B environment.
- Regarding the separation, FedEx expects it will unlock significant shareholder value by creating a pure-play LTL (less-than-truckload) company. FedEx Freight is set to become the largest carrier by revenue, with the broadest network and fastest transit times.
- Although smaller than the core Federal Express segment, FedEx Freight is more profitable, with a 14.3% operating margin in Q2 compared to 5.6% for Federal Express. Despite recent revenue declines, the separation is anticipated to coincide with an improving freight market by mid-2026.
Overall, while FedEx's Q2 results and guidance were underwhelming due to a weak industrial economy, the decision to separate its Freight segment is promising. FedEx Freight is expected to achieve a higher valuation as an independent entity. Old Dominion (ODFL, Financial) and XPO (XPO, Financial), the #2 and #4 LTL players, are trading lower on this news, as FedEx Freight is set to become the leading independent LTL player.
