FedEx Splits Into Two to Revive Growth, Stock Jumps

December 20, 2024 TruthUSA

FedEx saved a pleasant surprise for its stockholders ahead of the upcoming holiday season. It announced a plan to separate itself into two publicly traded companies. The news boosted its shares, which jumped 7 percent in premarket trading on Friday.

The two new companies, FedEx and FedEx Freight, will be in a better position to allocate capital effectively to pursue growth opportunities in the global parcel and less-than-truckload (LTL) markets.

“This is the right time to pursue a separation as we respond to the unique dynamics of the LTL market,” Raj Subramaniam, FedEx Corp. president and CEO, said in a statement accompanying the announcement of the separation.

“This announcement is a testament to the strength of the business our team has built, and to our dedication to doing what’s best for our customers, our team members, and our stockholders. Through this process, we will unlock value for our freight business and position FedEx to create even greater value for stockholders.”

“Over the last 50 years, FedEx has built an unmatched global platform that has produced significant value for our stockholders and opportunities for our team members,” said R. Brad Martin, vice chairman of the board and chairman of the Audit and Finance Committee who led the board’s oversight of the strategic analysis.

“Building upon that powerful foundation, and following a careful assessment of our portfolio, the FedEx Corporation Board is confident that a separation of FedEx Freight will drive continued growth and value creation.”

FedEx badly needs sales growth and value creation, as it has not been delivering much of either recently. For instance, sales in the second quarter of the current fiscal year, released on Thursday afternoon, came in at $22 billion versus the consensus estimate of $22.17 billion, following a slight sales decline in the first quarter.

That’s due to a reduced volume of priority services, which the Tennessee-based company has been trying to mitigate with price hikes. However, these price hikes have not been enough to deliver superior market returns for its capital holders, as measured by economic value added (EVA), which is the difference between return on invested capital (ROIC) and the weighted average cost of capital (WACC).

Gurufocus.com estimated that FedEx’s ROIC is 6.09 percent, while its WACC is 8.31 percent. As a result, it has an EVA of negative 2.22 percent, meaning that the company’s investments are destroying rather than creating value.

Wall Street doesn’t like this situation, because investors can get better returns for their capital in other publicly traded companies.

That could explain FedEx’s lackluster performance on Wall Street. Its shares lag the broader market year over year and barely match it over the past five years.

There are a couple of reasons for that. One is the rapid changes in the way individuals and businesses communicate and swap important documents online, which is reducing demand for physical delivery.

Another reason is that FedEx has become too large and too diverse. As a result, it has begun to experience diseconomies of scale, with size turning from a competitive advantage to a disadvantage.

This problem isn’t unique to FedEx. Over the past six decades, scores of U.S. companies have become too big and too diverse through acquisitions. But they soon ended up paying too much for businesses that offered too little opportunity.

The old GE is a case in point. The American business icon grew too big and diverse in the 1990s through an acquisition spree, eventually destroying rather than creating value for capital holders. As a result, its shares headed south, forcing its leadership to separate itself into several publicly traded companies.

More recently, activist Elliott has pressured Honeywell to split into two parts.

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