FedEx Freight, operating independently since June, announced a significant quarterly beat, with Q3 revenue up 8% to $2.44 billion and adjusted EPS of $1.49, both exceeding analyst expectations. Shares rose 3% in extended trading, reflecting investor confidence in the company’s operational improvements and enhanced pricing leverage as a standalone entity. Despite a lowered price target due to industry-wide pressures, the company’s strong guidance and improving service metrics signal a positive trajectory.
FedEx Freight, in its nascent journey as a standalone public company since its June spin-off, has delivered a much-anticipated quarterly beat. The less-than-truckload (LTL) shipping provider reported robust top and bottom-line figures for the three months ending in September, coupled with encouraging remarks on its ongoing self-help initiatives.
The company's revenue climbed 8% to $2.44 billion, comfortably surpassing the LSEG consensus of $2.33 billion. Adjusted earnings per share (EPS) also exceeded expectations, reaching $1.49 against a consensus of $1.36, as per LSEG data.
Following this positive report, shares of FedEx Freight (FDXF) saw a welcome boost, rising approximately 3% in extended trading. This reaction is particularly significant given the stock's challenging performance since its June debut, which saw it drift lower. New spin-offs often experience an adjustment period as initial investors decide whether to retain or divest their shares. Furthermore, the transportation sector, including FDXF, has faced headwinds from elevated fuel prices, a factor complicated by global events.
FedEx Freight specializes in less-than-truckload (LTL) services, consolidating shipments from multiple customers onto a single trailer. These shipments are typically too large for standard parcel delivery (e.g., over 150 pounds or several pallets) but do not require a full truckload. Key competitors in this space include Old Dominion Freight Line, XPO, and J.B. Hunt.
Despite the stock's recent drawdown, our investment thesis remains focused on FedEx Freight's potential for operational improvements now that it operates independently from FedEx Corp. Recognizing that such transformations take time, Thursday's earnings report provided crucial insights into its progress and future plans.
CEO John Smith highlighted increased leverage in pricing negotiations as a standalone entity, contrasting with previous bundled contracts under FedEx. "Since June 1, we have successfully renewed approximately 25% of our contractual portfolio and achieved our strongest renewal pricing performance in recent years," Smith stated. He added that with approximately two-thirds of revenue from negotiated customer pricing, this performance bodes well for future yield improvement.
Another strategic advantage post-spin-off is FedEx Freight's dedicated salesforce, now solely focused on the LTL market and pursuing business in attractive industries. Smith noted growth in verticals such as aerospace (up about 3% in the first four months), food, technology, and significantly, the retail sector. He anticipates further progress into 2027.
While still favoring FedEx Corp, our portfolio maintains a holding in FedEx Freight, reiterating a buy-equivalent 1 rating. However, the price target has been adjusted to $160 from $175, reflecting broader price-to-earnings multiple compression within the trucking industry, influenced by factors like the Middle East conflict and rising fuel costs.
In related news, FedEx Corp also reported better-than-expected results, with shares recovering to finish up 1% in Thursday's regular session, despite an initial dip due to a soft current-quarter outlook.
Key Commentary and Performance Metrics:
- Revenue per shipment (excluding fuel surcharges) increased 1.1% year-over-year to $316.78, offsetting a 0.7% decline in average daily shipments.
- Average daily shipments have shown a consistent monthly improvement since March: -3.4% in June, -2.2% in July, -0.7% in August, and a positive +0.9% in September.
- High on-time service and pick-up reliability (98%) are expected to help gain market share during the crucial shopping season.
- Customer service quality has improved, evidenced by consistently lower claims ratio (0.43%) and frequency of claims (0.27%) since 2022.
Fourth-Quarter Guidance:
- Revenue: $2.30 billion to $2.37 billion (above $2.2 billion LSEG consensus).
- Adjusted operating income: $185 million to $205 million (above $172 million FactSet consensus).
- Adjusted operating margin: 8% to 8.6% (versus 7.7% FactSet expectations).
- Adjusted EPS: 65 cents to 75 cents (above 53 cents LSEG consensus).
Portfolio analyst Zev Fima contributed to this earnings analysis.
