Investors are getting more optionality when it comes to playing the less-than-truckload market. FedEx Corp. said Thursday it will move forward with a plan to spin off FedEx Freight, the nation’s largest LTL carrier, which experts say could be worth as much as $30 billion.
Details surrounding the transaction were sparse, but FedEx (NYSE: FDX) said separating into two publicly listed companies – a domestic and international package and freight business generating $78 billion in annual revenue, and a domestic LTL carrier with a nearly $10 billion top line – is the best path to unlock “significant value” for shareholders.
LTL stocks have been in favor since COVID and FedEx is looking to cash in.
The heavily consolidated LTL industry (there are just a few full-scale, national players) benefited greatly during the pandemic. Less-than-truckload networks proved a natural fit for delivery of big-and-bulky items in addition to being a good provider of linehaul service to e-commerce companies. Carriers are also now more willing to make big investments in tech and other service-related initiatives, which have proved to have a direct correlation with higher yields and ultimately earnings.
That has produced some rich equity valuations.
Valuation multiples on LTL carriers have swelled from topping out near 20 times earnings in past cycles to 40 times, and higher. That’s a far cry from the midteens multiple FedEx garners, and the reason the company is moving forward with the breakup.
Shares of FDX moved 8.9% higher in after-hours trading on Thursday but were down 0.5% shortly after the Friday open.
A spinoff is expected to occur within the next 18 months.
LTL pure plays no longer a scarcity?
Less-than-truckload pure plays were a scarcity a couple of years ago with the comp pool largely consisting of Old Dominion Freight Line (NASDAQ: ODFL) and Saia (NASDAQ: SAIA).
ArcBest (NASDAQ: ARCB) subsidiary ABF Freight has traditionally presented an LTL play, but the company’s asset-light brokerage and managed transportation offerings now account for more than one-third of revenue and will one day represent half.
Yellow Corp. (OTC: YELLQ) wasn’t really an option for many investors as it walked the profitability tightrope and possessed an untenable debt structure for years before it eventually shut down last year.
Forward Air’s (NASDAQ: FWRD) expedited LTL offering often received interest from some investors. However, following a botched merger, it appears more likely to be taken private than to continue as a public company. Even if it remains public, it now has a large freight forwarding component, as well as a heavy debt burden, making it currently more attractive to event-driven and activist investors than traditional LTL investors.
But the tide has turned. More available comps will put more focus on the space and likely push total LTL equity investment dollars higher.
In 2022, XPO Logistics split up the transportation and logistics business it had amassed through a decade of acquisitions. At the time, it said the multimodal company’s valuation was being penalized with a conglomerate’s discount. XPO (NYSE: XPO) is largely viewed as an LTL pure play today even though it still has to divest its European transportation business. But that’s a matter of when not if.
The public entities that once made up XPO Logistics now have a combined market cap more than double the amount prior to the decision to execute a breakup.
TFI International (NYSE: TFII) acquired UPS Freight in 2021 and now has plans to spin off its truckload operations. That would result in TFI’s LTL unit, TForce, being a largely stand-alone LTL company. (The unit has about 15% revenue exposure to the package and courier markets.) TFI said it needs to get bigger to accomplish this and is hopeful to make a $4 billion to $5 billion acquisition in the U.S. LTL market by late next year.
Roadrunner (OTC: RRTS) is making its way back as a stand-alone LTL operation focused on long-haul, metro-to-metro shipments after it underwent a restructuring. The company recently changed hands and received a capital infusion.
Knight-Swift Transportation (NYSE: KNX), traditionally a truckload services provider, has purchased three regional LTLs since 2021. However, with just north of $1 billion in LTL revenue, and the need to acquire a Northeast operator and fill other coverage gaps to patch together a national network, it’s likely a long way from being able to break up the business.
FedEx Freight sees tough quarter
FedEx touted 1,100 basis points of margin improvement (over a five-year stretch) at FedEx Freight when it announced Thursday it was spinning off the segment. However, it coughed up a few points during its fiscal second quarter ended Nov. 30.
The LTL business reported an 85.7% operating ratio (inverse of operating margin) for the quarter, 570 bps worse year over year and 450 bps worse sequentially. The year-ago period had the benefit of a $30 million (120-bp) gain from terminal sales, which negatively skews the comp.
Table: FedEx Freight’s key performance indicators
A soft industrial landscape weighed on results.
Revenue fell 11% y/y to $2.18 billion as tonnage fell by a similar percentage and revenue per hundredweight (yield) was basically flat. Lighter shipments weights, down 3.5% y/y, weighed on results.
A 3.5% decline in revenue per shipment was amplified by a 3.5% increase in cost per shipment. Salaries, wages and benefits as a percentage of revenue increased 330 bps y/y.
SONAR: Longhaul LTL Monthly Rate per Ton Mile, Class 125+ Index. Less-than-truckload monthly indices are based on the median rate per ton mile for four National Motor Freight Classification groupings and five different mileage bands. To learn more about SONAR, click here.
SONAR: Midhaul LTL Monthly Rate per Ton Mile, Class 70-85 Index for 2024 (blue shaded area), 2023 (pink), 2022 (green) and 2021 (yellow). To learn more about SONAR, click here.
This was not the quarter the company hoped for as it looks to attract new investors. Management said there will be y/y revenue declines in the business in the second half of its fiscal year (ending May 31) but that the recent period will likely prove to be the trough for freight revenue.
FedEx said the split will provide enhanced operational focus at both businesses.
It now sees an “opportunity to play offense” in the LTL market and will start hiring sales professionals in January with a goal of adding 300 in short order. It also said it will implement an enhanced pricing system, which it hopes will allow it to win business and better fill existing capacity.
FedEx will remain a customer of FedEx Freight following the split. Management pushed back on the view that some LTL contracts carry lower rates as they are part of bundled services agreements. It said the bulk of its LTL volume comes from separately negotiated contracts. It also said it will now aim for a heavier mix of industrial freight, which often accompanies a higher margin profile.
On a consolidated basis, FedEx generated revenue of $22 billion in the period, down 0.9% y/y. Adjusted earnings per share came in better than expected at $4.05, 6 cents higher y/y.
The company lowered its fiscal 2025 outlook again. It now expects consolidated revenue to be flat y/y (versus the expectation of a low-single-digit increase previously), and $19 to $20 in adjusted EPS ($1 lower at each end of the range).
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