10:09 AM EST, 12/23/2024 (MT Newswires) -- FedEx ( FDX ) shares bounced after the company's earnings report even as sales declined and guidance was lowered thanks to a long-anticipated reorganization announcement that analysts say will drive investor value.

FedEx ( FDX ) will spin off its freight division, making it the largest pure-play less-than-truckload, or LTL, business by revenue in the US, it said last week. By untethering freight from the rest of the company, executives believe it will be able to achieve a premium valuation like its LTL competitors, most notably Old Dominion Freight Line (ODFL), one of the best performing stocks on the Standard & Poor's 500 over the past decade, according to Ari Rosa, an equity analyst at Citigroup.

"If you look at the way FedEx ( FDX ) is being valued versus the way some of these LTL carriers are being valued, you can see why it would be very alluring to them to spin off this division and hopefully realize some of that upside, realize some of that valuation unlock," Rosa told MT Newswires in an interview.

Old Dominion and other LTL companies provide earnings results that are straightforward and easy to understand, but Rosa said FedEx's ( FDX ) more complex and opaque reporting structure has made it more difficult to evaluate freight, weighing on its valuation. After the split, freight will no longer be lumped in with FedEx Express, its low-margin, capital-intensive parcel-delivery service that has come under pressure.

"The reality is that parcel is just a much more complicated and, frankly, difficult business and lower-margin business than LTL," Rosa said. "To the extent that people associated FedEx ( FDX ) with that parcel delivery business, that was a big part of what held them back."

FedEx's ( FDX ) fiscal second-quarter adjusted earnings rose to $4.05 per share, up from $3.99 a year ago and above the consensus estimate of analysts surveyed by FactSet calling for $4.01. Sales were $22 billion, down from $22.2 billion a year ago and shy of the FactSet consensus estimate of $22.1 billion. The company lowered its fiscal 2025 adjusted EPS guidance to a range of $19 to $20 from $20 to $21.

FedEx Freight revenue fell 11% to $2.18 billion in the three months through Nov. 30. LTL freight shipments were down 8% year-on-year in November, the third straight month of decreases, according to an investor presentation.

The freight separation is expected to be done within 18 months, executives said late Thursday on the company's earnings call, according to a FactSet transcript. As part of the spin-off, freight expects to add over 300 LTL specialists, create an enhanced pricing and invoicing system, improve freight and FedEx ( FDX ) network efficiencies and lean into LTL-focused automation, Chief Executive Raj Subramaniam said.

"Making changes in network operations on the fly is really difficult," said Jay Van Sciver, an industrials analyst at Hedgeye Risk Management, in an interview. He expects to see a lot of the separation executed through service agreements with Express, meaning freight will operate much like it does now but as a separate corporate entity with different management.

"It's going to take 18 months, it's not going to happen quickly, but they'll get a lot of agreements, and FedEx Freight is going to continue to move a lot of freight for FedEx ( FDX )," Van Sciver said. "Eighteen months from now, I don't suspect people will notice a lot of difference."

Financials in the Express segment will draw more investor scrutiny, as freight will no longer be there to buffer its volatile earnings, Citi's Rosa said.

"Management is basically expressing a lot of confidence that it's going to be able to turn around the Express business and have a little more consistent results there," Rosa said. "They've been very motivated to fix Express, but the reality is that it's hard to fix.

Carving out freight "gives them a fresh starting point to do that and doubles down on the importance and urgency of fixing that business because at some point it's going to have to stand on its own two feet," the analyst said.

Price: 270.19, Change: -5.54, Percent Change: -2.01