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UPS vs. FedEx: Which Stock Is the Better Buy?

Both companies are facing global economic headwinds

   

United Parcel Service (NYSE:UPS) might have posted better quarterly results than rival FedEx (NYSE:FDX), but that doesn’t necessarily make it the better stock.

UPS, the world’s biggest package-delivery company, reported a Street-beating 6.9% increase in first-quarter profit Thursday, helped by a strong shopping on the part of U.S. consumers in the post-holiday period.

FedEx, the world’s biggest international air shipping company, said back in March that quarterly profit tumbled 31% on weakness in Asia and cost-cutting efforts. FedEx’s results missed analysts’ average forecast and the shipper slashed its earnings outlook.

Both companies are seen as global economic bellwethers because they handle freight and logistics for everything from banks to retailers to auto parts suppliers. And the slowdown in the global economy has been hard on both UPS’s and FedEx’s businesses.

Here’s a summary of what delivery companies are facing these days, as summed up by analysts at Trefis:

“Sluggish global GDP growth driven by policy uncertainties in the U.S., China recording the slowest growth rate in a decade and Europe’s struggle with an economic nightmare is driving feeble consumer demand globally. Slower than expected trade growth has negatively impacted the global freight industry as yields have plummeted due to tough competition. Moreover, continuing shift in freight traffic from air to the sea, driven by higher fuel prices is not helping the air-cargo industry at all.”

The shift away from air shipments has been especially hard on FedEx. Revenue and earnings have been under pressure for the better part of a year because of lower demand for its Express service — the premium (and higher-margin) business that companies use to move things lickety-split. Indeed, the just-in-time delivery service is the biggest contributor to FedEx’s top line.

UPS, meanwhile, enjoyed strong first-quarter volumes in the U.S. in the business-to-consumer segment. Shoppers went on a post-holiday buying frenzy, no doubt taking advantage of bargains and clearance sales.

Still, UPS’s revenue came up short of Wall Street’s forecast. And while UPS maintained its full-year forecast, it’s an outlook that remains quite tepid. Europe is sluggish, Asia is slowing down and the U.S. economy will probably grow only 2% this year, in the company’s view.

Both delivery firms face the same global economic challenges, but have slightly different specific headwinds. The pop UPS saw in first-quarter business-to-shopper volume is unlikely to be repeated now that the post-holiday sales have gone and payroll taxes have climbed.

True, FedEx is more reliant on higher priced, overnight international delivery, but it’s also slashing costs and cutting capacity in the Express service. The company figures it can realize an additional $1.7 billion in profit by slimming down that division.

So which stock looks like a better buy right now?

Based on valuation alone, it appears that you’re more likely to get a bargain buying FedEx.

Compared to peers, UPS is trading at a significant premium by trailing price-to-earnings (P/E), according to data from Thomson Reuters Stock Reports. It does, however, trade at a 6% discount to its own five-year average forward P/E.

By comparison, FedEx’s P/E offers a steep discount to industry peers. Additionally, by forward P/E, the stock is 18% cheaper than its own five-year average.

FedEx also has better long-term growth prospects, by Wall Street’s estimation. FedEx is forecast to grow earnings by an average of 12.6% a year for the next five years. UPS’s long-term growth rate stands at 9.4%, which is only slightly higher than the broader market’s.

Finally, for what it’s worth, analysts’ average price target on UPS stands at $91. Add in the 3% forward yield on the dividend, and you get an implied upside of 9.7% in the next 12 months or so.

Wall Street’s average price target on FedEx is $116. Add in the 0.6% yield on the dividend, and the implied upside to comes to 24%.

UPS’s business and stock might be handling the global slowdown better than FedEx’s — but FedEx looks to be the better bet for buying low.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/04/ups-vs-fedex-which-stock-is-the-better-buy/.

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