Surprise positive earnings by FedEx (NYSE:FDX) sent its stock soaring nearly 20% last week. The package delivery specialist easily beat Wall Street’s fiscal fourth-quarter revenue and earnings estimates, helping to lift shares to one of its best one-day performances.
A $2.5 billion stock buyback announcement and potential spin-off boosted FedEx stock. In fact, shares are higher than they have been at any time since the pandemic, indicating the package delivery leaders on the road to recovery.
Package Delivery and FedEx Stock
It has been a challenging ride higher for FedEx stock. Several times over the past five years, even before the global health care crisis, its stock fell sharply as volume declined. Shares dropped 50% between its 2021 high and its late-2022 low. But FedEex has been on the road to growth since
Mind you, the current quarterly earnings report wasn’t the blowout the stock’s reaction suggested. Revenue grew 1% to $22.1 billion generating adjusted profits of $5.41 per share, a 9.5% gain.
That came about as the package delivery company continued to right-size its business.
It gained 67 cents on business optimization costs although that was more than offset by mark-to-market adjustments made to its retirement plans that cost it $1.72 per share.
Still, it improved operating margins to 7% from 6.9% last year.
It marked the fourth consecutive quarter of expanding its operating income and margins despite the challenging revenue environment it finds itself in. Average daily packages fell 1% to almost 5.4 million.
Rival UPS (NYSE:UPS) is scheduled to report fiscal first-quarter 2025 earnings later this month. Wall Street is looking for a 6.6% increase in revenue and a 32% gain in profits.
Spin-Off Opportunity
What may have excited investors most was FedEx’s plans to calve off the LTL division. The FedEx Freight business saw a 2% increase in revenue to $2.3 billion generating a 13% increase in operating income to $506 million.
The freight unit is one of FedEx’s more profitable businesses so spinning it off could pay substantial dividends for investors.
Freight produced $1.9 billion in operating in fiscal 2023, a 16% increase from the year before, with margins of 20% or more than twice what the next unit generated. Separating the unit could unlock significant value for shareholders.
Old Dominion Freight Lines (NASDAQ:ODFL), the second-largest LTL stock behind FedEx, trades at 25 times next year’s earnings. XPO Logistics (NYSE:XPO) goes for 22x estimates.
A Right-Sized Growth Engine
FedEx is still cutting its business down to size. The delivery stock is looking to fire as many as 2,000 employees in Europe.
The cuts will cost the company between $250 million and $375 million over the next two years. Global shipping demand remains in decline following the pandemic boom.
Although e-commerce represents 15.9% of all retail sales, according to the U.S. Census Bureau, that’s down 17% from the fourth quarter of 2023.
That was a record-high quarter for e-commerce, but the first quarter’s results were also 980 basis points below the mid-pandemic peak.
As FedEx continues cutting costs and possibly spinning off its freight business, FDX stock looks more attractive. Even as it closes in on a new all-time high, it looks like open highways for future growth.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
