Investors are getting more optionality when it comes to playing the less-than-truckload market. FedEx Corp. said Thursday it will move forward with a plan to spin off FedEx Freight, the nation's largest LTL carrier, which experts say could be worth as much as $30 billion.
Details surrounding the transaction were sparse, but FedEx (NYSE: FDX) said separating into two publicly listed companies - a domestic and international package and freight business generating $78 billion in annual revenue, and a domestic LTL carrier with a nearly $10 billion top line - is the best path to unlock "significant value" for shareholders.
LTL stocks have been in favor since COVID and FedEx is looking to cash in.
The heavily consolidated LTL industry (there are just a few full-scale, national players) benefited greatly during the pandemic. Less-than-truckload networks proved a natural fit for delivery of big-and-bulky items in addition to being a good provider of linehaul service to e-commerce companies. Carriers are also now more willing to make big investments in tech and other service-related initiatives, which have proved to have a direct correlation with higher yields and ultimately earnings.
That has produced some rich equity valuations.
Valuation multiples on LTL carriers have swelled from topping out near 20 times earnings in past cycles to 40 times, and higher. That's a far cry from the midteens multiple FedEx garners, and the reason the company is moving forward with the breakup.
Shares of FDX moved 8.9% higher in after-hours trading on Thursday but were down 0.5% shortly after the Friday open.
A spinoff is expected to occur within the next 18 months.
Less-than-truckload pure plays were a scarcity a couple of years ago with the comp pool largely consisting of Old Dominion Freight Line (NASDAQ: ODFL) and Saia (NASDAQ: SAIA).
ArcBest (NASDAQ: ARCB) subsidiary ABF Freight has traditionally presented an LTL play, but the company's asset-light brokerage and managed transportation offerings now account for more than one-third of revenue and will one day represent half.
Yellow Corp. (OTC: YELLQ) wasn't really an option for many investors as it walked the profitability tightrope and possessed an untenable debt structure for years before it eventually shut down last year.
Forward Air's (NASDAQ: FWRD) expedited LTL offering often received interest from some investors. However, following a botched merger, it appears more likely to be taken private than to continue as a public company. Even if it remains public, it now has a large freight forwarding component, as well as a heavy debt burden, making it currently more attractive to event-driven and activist investors than traditional LTL investors.