Will FedEx’s Spinoff Boost Its Stock Price?

In a pre-holiday surprise announcement, management at FedEx (NYSE:FDX) released news of a plan to spin off FedEx Freight into a standalone entity that also would be publicly traded.

Given the headwinds the firm has faced from pricing to cost-sensitive customers, the spinoff offers a potential boon to existing shareholders. FedEx Freight handles less-than-truckload shipping for the company, a business that could be distracting the company from its main business of parcel delivery.

While the spinoff may not be complete for as long as 18 months, the markets are already pricing its effects into FedEx shares. Where will FedEx go from here, and will the decision to spin FedEx Freight off help push FDX shares higher in the long run?

How Could the Move Affect Share Prices?

So far, the market’s early response to the FedEx Freight spinoff has been fairly positive. The day the plan was formally announced, share prices rose by about 8 percent in after-hours trading. Such short-term volatility, however, may or may not last. The market will need to see how much value FedEx can unlock by spinning FedEx freight off before accurately repricing the stock.

Taking a longer view, there’s a very good chance that FDX shares could see more substantial tailwinds from this decision. Once separated from FedEx Freight, the company will be able to pursue better operational efficiencies to enhance its earnings growth. Once realized, these improvements in earnings could help FedEx shares move progressively higher.

While the spinoff is quite likely to support higher share prices, it’s still important to understand that FedEx has been facing a difficult macroeconomic environment recently. Weak demand in the US has put pressure on the company’s performance, a fact that was on full display in the most recent quarterly report.

In fiscal Q2, FedEx reported revenues of $22.0 billion and GAAP net income of $740 million. These metrics both compared poorly to the $22.2 billion in revenue and $900 million net income reported a year earlier.

As such, investors may have to consider the possibility of downward pressure on FDX in the short run if demand stays where it is now. The chances of a recession occurring in the next 12 months are also estimated at a little over 40 percent.

If a recession did begin, FedEx and other parcel carriers would almost certainly see a further erosion of demand for their shipping services. While the spinoff is very likely in the best interest of shareholders over time, there’s certainly no guarantee that FDX will follow a straight line up from here.

The good news is that long-term trends still point to earnings growth at FedEx. Over the next five years, analysts expect earnings per share to compound at around 13 percent annually. FedEx is already pursuing cost-cutting measures under its DRIVE program that are expected to eventually save the company over $2 billion. So, while FedEx isn’t out of the woods yet, the chances of a turnaround seem reasonably high.

Is FedEx a Good Buy?

In addition to looking at the effects of the FedEx Freight spinoff, it’s also important to ask whether the company as a whole is a good buy. In the case of FDX, there’s a reasonably strong value argument for purchasing the stock at today’s prices. At 14.3 times forward earnings and 7.6 times cash flow, FedEx is priced at a low level even for a blue-chip company that’s going through some hard times.

FedEx’s strong dividends could also help investors get more stable returns as the company continues to reorganize and pursue improved earnings growth. At nearly 2 percent, the stock’s dividend yield is substantially above the average of the S&P 500. FedEx’s dividend payout ratio is also just over 35 percent, meaning that the company still has quite a bit of room for future dividend growth.

Wall Street appears enthusiastic about FDX right now. The average target price for the stock over the next 12 months is $331, a gain of about 20 percent from its last close at $275.73. Institutional buyers have also been bulking up their FedEx positions quite a lot this year. In the last 12 months, institutional investors have purchased about $7.3 billion worth of FDX while only selling $2.7 billion.

The bottom line is value investors will see the big upside to fair value of $325.73 per share as highly appealing while growth investors will flock to the spinoff as an opportunity for long-term gain once the freight business has been separated. So too income investors can find the 1.97% yield appetizing enough to part with their money. All in all, the decision to spin off FedEx Freight appears likely to give the stock decent tailwinds over the coming years and should support higher share prices.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.