by Susan J. Aluise | November 21, 2012 7:00 am
Black Friday might be making headlines this week, but many shoppers are trading in an early trip to brick-and-mortars for some simple online shopping. In fact, retail revenue on Cyber Monday — the Monday after Thanksgiving — could reach $2 billion, according to Adobe’s Online Shopping Forecast. That would make for growth of 18% year-over-year.
That’s especially good news for two non-retail names: FedEx (NYSE:FDX) and United Parcel Service (NYSE:UPS). Because until someone invents a Star-Trek era transporter, retailers will need shipping companies to move those purchases. Both companies expect to see double-digit growth in terms of packages shipped this holiday season.
But while both should have a happy holidays, which stock is the better bet down the line? Let’s take a look:
FedEx’s deal with the U.S. Postal Service, known as the SmartPost service, is one of its biggest assets. FedEx picks up and processes e-commerce shipments, transports them via jet to their location and the Post Office makes the final delivery. SmartPost volumes are up 18% on the strength of rising e-commerce sales and FedEx brings in an estimated $1.5 billion in annual business from the contract.
That’s not all, though. Another area of strength is its freight business, where operating income from “less than truckload” (LTL) shipping rose a whopping 114% in Q1. The increase was driven by 12% growth in volume of economy freight.
Plus, FedEx has embarked on a huge new cost-cutting initiative that will weed out $1.7 billion in spending over the next three years. The plan includes a move to cloud computing and deployment of a more fuel-efficient aircraft fleet.
But rival UPS isn’t without its own share of solid services. Most notably, the company has a robust logistics system in place to manage a sophisticated international supply chain. UPS also snatched up Dutch delivery and logistics firm TNT Express, a deal that was recently finalized. The TNT deal bolsters UPS’ international presence and complements last year’s $200 million expansion of Brown’s Cologne air hub.
Still, each company is facing its share of challenges. FedEx’s Express unit, for one, continues to take a hit as frugal shippers — and their cost-conscious customers — decide slower and cheaper is better. Another note of caution: FedEx’s contrast with the Postal Service expires next year and UPS plans to go after it.
UPS could use that deal as its heavy exposure to Europe — exacerbated by the TNT deal — creates strong short-term headwinds. Brown also is struggling to grow domestic parcel volume and faces significant expenses from the acquisition, although they should pay off down the road.
Of course, the fundamentals of the stocks are important too, While UPS has a larger market capitalization, it also looks a little overpriced. FedEx trades at about 11 times forward earnings and has a price to earnings growth (PEG) ratio of 1.1. Meanwhile, UPS has a forward P/E of 14 and PEG ratio of nearly 1.6.
FedEx is also leading the way in terms of performance for now with a one-year return of about 8.5%, beating out UPS’s 6% gain.
Of course, that doesn’t factor in payouts to investors, in which UPS makes up lost ground. The company has an attractive current dividend yield of 3.3% and has increased its dividend every year since 2002.
FDX, on the other hand, pays a nominal dividend with a current yield of 0.7%. Still, it has raised its dividend nine times since it began paying a dividend a decade ago and hopes to do so again with savings from the cost-cutting program.
At the end of the day, I have to give the win to FedEx because of two big red flags on UPS’ end: growing exposure to troublesome Europe and a richer valuation. And while I love Brown’s 3.3% dividend, FedEx execs are considering a hike in the dividend in the near future.
Plus, FedEx’s gains in the LTL market and its $1.7 billion cost-cutting initiative are both significant and could be enough to carry the company even if it were to lose the USPS bid next year. All in all, FedEx looks like the better package for your portfolio for the holiday season and beyond.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.
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