Fun fact: yesterday was “Green Monday,” the busiest shipping day of the year.
The last of the Cyber Monday purchases are shipping out and those with far flung loved ones are rushing to the post office to make the December 25 deadline. And this has big implications for shipping giants FedEx (NYSE:FDX) and United Parcel Service (NYSE:UPS): FedEx alone expects more than 19 million packages to ship out—nearly 7% of its total haul for the holiday season. The 280 million shipments forecast for this year also represents a 13% jump over last year.
So it’s no wonder that the two companies are adding a total 75,000 seasonal employees to their payrolls. At first glance, this growth looks to be a good buying opportunity for investors, but before you place an order, you’ll want to read what I have to say next.
Right now, shipping companies are being forced to adapt to a change in consumer preferences. Strapped for cash, many are opting for slower, cheaper methods of transportation rather than premium shipping services. This has had real consequences for America’s two top shipping companies.
For those of you who keep up with my Stock of the Day feature, I covered FedEx just last week. At the time I gave FDX a C-rating (making it a hold), and not much has changed since then. Even with the expected uptick in shipping activity, analysts expect FedEx’s sales to climb 2.4% and its earnings to actually dip 10.2% this quarter.
This is especially weak when you consider that the rest of the industry is headed towards 12.1% growth. Next quarter, earnings are expected to drop 4.5% even though FedEx is hiking up its ground shipping rates by nearly 5%. The fact is that FedEx’s financial issues run so deep that it is offering to pay its employees to leave the company (in an effort to cut annual costs by $1.7 billion by 2015).
And the picture isn’t much better with United Parcel Service. UPS is also raising its rates by an average of 4.5% next year. But it’ll take more than that to reverse UPS’ track record of missing analyst estimates by a landslide as well as lackluster top- and bottom-line growth. For the next few quarters, UPS is expected to underperform the industry average in terms of bottom-line growth.
Part of the problem is that UPS has been so busy convincing the E.U. to approve its takeover of the Netherland’s TNT Express NV, a move that will expose it to the region’s ongoing economic issues. Institutional investors recognize this, so buying pressure for this Conservative stock has tanked since the late summer. UPS is currently a D-rated sell.
In fact, I recommend that you steer clear of the shipping industry for now. The best rated stock in this the Air Freight and Logistics industry is XPO Logistics (NYSE:XPO), but that’s only thanks to its relatively solid buying pressure. Underneath this, the company has mixed fundamentals, including terrible operating margin growth, return on equity and analyst earnings revisions, so just a slight dip in buying pressure could send it into hold territory.
There’s no doubt that holiday gift giving will lift certain industries, especially retail, but I don’t consider shipping to be one of them.