FedEx cost cuts are delivering results and potential freight spinoff is 'tantalizing': analysts

By James Rogers

FedEx has placed its freight business under strategic review, the company said when it reported fiscal fourth-quarter results Tuesday

FedEx Corp.'s ongoing cost-cutting efforts are delivering results, say analysts, who also welcome the package deliverer's strategic review of its freight business.

In its fiscal fourth-quarter results Tuesday, FedEx (FDX) said it expected improved demand for the coming fiscal year, sending its stock soaring 15.5% on Wednesday. The company also said that it is conducting an assessment of FedEx Freight's role in the company's "value-creation plans" and that it plans to complete the review by the end of the calendar year.

The company's capital spending was $5.2 billion in fiscal 2024, down 16% from $6.2 billion in fiscal 2023.

Related: FedEx rallies after big cost cuts, but one analyst wonders if the easy reductions are in the past

TD Cowen raised its FedEx price target to $335 from $320 on Wednesday, citing FedEx's efforts to cut costs. "The company continues to execute well on its cost-cutting initiatives, and we view this quarter as more proof that DRIVE is working," TD Cowen analyst Helane Becker wrote in a note, referring to FedEx's ongoing cost-cutting program. TD Cowen maintained its buy rating for FedEx.

FedEx's fiscal 2025 outlook includes $2.2 billion of DRIVE cost savings, according to the company's fourth-quarter earnings release.

Raymond James also raised its FedEx price target to $335 on Wednesday.

"We are maintaining our Outperform rating as we believe that palpable change is afoot as [FedEx's] DRIVE initiatives continue to take hold likely driving better margins, earnings, and [free cash flow] in out years than appreciated," wrote Raymond James analyst Patrick Tyler Brown.

"Simply, we believe that management's shift toward integrating its Express & Ground offering (Network 2.0), its focus on attacking costs across various functional buckets (backbone of DRIVE), enhanced capital allocation scrutiny (capex), and a more shareholder-friendly capital return program (new buyback program) all set the stage to drive improved shareholder returns."

Related: FedEx delivers gains, while Rivian goes into overdrive

The analyst also pointed to FedEx's review of its freight business. "We believe the recent announcement of the Freight segment strategic review highlights management's urgency to drive shareholder value," he added.

"The big news is FedEx Freight is under strategic portfolio review - likely a spinoff, in our view," Stifel analyst Bruce Chan wrote in a note released Wednesday. The analyst described a potential freight spinoff as "tantalizing."

"The division has quietly grown from the family outcast to the most profitable division in the portfolio, and with peer valuations at nearly double that of FedEx, such a move makes sense to us. There's still a lot of wood to chop, but we feel even better about being on this ride," he wrote. Stifel raised its FedEx price target to $327 from $303 and reiterated its buy rating for the company.

Related: Wall Street sees corporate profit margins creeping toward 2021 levels, as three household names prep earnings

In its fourth-quarter earnings release, FedEx said that freight operating results increased due to higher yield and effective cost management. "FedEx Freight has announced plans to further optimize its operations and match capacity with demand through the planned permanent closure of seven facilities," the company said.

Of 32 analysts surveyed by FactSet, 20 have an overweight or buy rating, 10 have a hold rating and two have an underweight or sell rating for FedEx.

FedEx shares are up 17.1% in 2024, outpacing the S&P 500 index's SPX gain of 14.8%.

-James Rogers

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06-26-24 1725ET

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