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FedEx (FDX) reported mixed Q2 (Nov) earnings results last night. The company reported modest EPS upside while revs were a bit light. It also lowered FY25 adjusted EPS and revenue guidance to $19.00-20.00 and flat, respectively, on a more timid demand environment. The bigger news was that FDX said it would pursue a full separation of its FedEx Freight segment, creating a new publicly traded company within the next 18 months or so.

• Revenue declined 0.9% yr/yr to $21.97 bln. A soft global industrial economy, coupled with a competitive pricing environment, constrained FDX's results in Q2. Also, the Postal Service contract expiration on Sept 29 negatively affected two months of the quarter. FDX noted that US manufacturing PMI has indicated a contraction for 24 out of the past 25 months, the second longest downturn in US history.
• At its Federal Express unit, revenue was flat at $18.84 bln. FDX again saw increased demand for lower-yielding services. FedEx Freight segment revenue declined 11% yr/yr to $2.18 bln, driven by the soft industrial economy. Freight saw lower volumes, lower fuel surcharges, and lower weight per shipment. Also, comparisons were challenging because some customers won last year from the Yellow bankruptcy have since left in search of lower prices.
• Turning to volume trends by service, volumes were pressured, led by weakness in the US domestic market, partially offset by strong international growth. Across US domestic express services, volumes declined 1%, primarily due to weakness in the industrial economy. Ground volumes were down 1% as well, with the soft B2B environment weighing on ground commercial growth.
• Let's dig into the separation. We predicted this announcement might happen in our preview yesterday. FDX expects the separation will unlock significant value for shareholders by creating a pure-play LTL (less-than-truckload) company. In fact, FedEx Freight will be the largest carrier by revenue with the broadest network and the fastest transit times.
• As you can see above, Freight is much smaller than its core Federal Express segment. However, it is much more profitable, boasting segment operating margin of 14.3% in Q2 vs 5.6% for its Federal Express segment. The main negative with Freight is that revenue has been declining in recent quarters. The hope is that by the time the separation occurs, roughly by mid-2026, the freight market will be showing improvement.

Overall, the Q2 results/guidance were not great as FedEx struggles with a weak industrial economy. However, we like the idea to separate its Freight segment. We think FedEx Freight would likely garner a higher multiple and thereby unlock value if it would trade separately. Old Dominion (ODFL -6%) and XPO (XPO -4%) are the #2 and #4 LTL players. They trade at forward P/E's of 30.6x and 30.8x, respectively. FedEx trades at a forward P/E of 12.1x, so you have to think Freight's multiple is being stymied and would unlock value on its own. ODFL and XPO are both lower on the news that the #1 LTL player will soon be independent.