FDX vs. UPS: Which Stock Delivers More For Investors?

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A year after last-minute purchases and devastating winter storms caused holiday delivery delays, FedEx Corporation (NYSE:FDX) and United Parcel Service, Inc. (NYSE:UPS) bounced back with both carriers reporting on-time performance of 98%.

UPS__FedEx_Work_to_Avoid_Another_Christmas_Shipping_Fiasco.jpgBut while both companies managed to make e-commerce customers happier, all is not equal in the minds of investors.

UPS shares lost more than 10% of their value in less than a week since the company announced that its strategy to boost on-time performance cost Brown $200 million more than expected.

UPS, which will release fourth quarter earnings Tuesday, has pared back its earnings-per-share estimates to $1.25 — far lower than the $1.49 Wall Street expected. Full-year 2014 earnings also will take a hit, and Brown’s $180 million hike in pension costs could adversely impact 2015.

FedEx rubbed a little salt into Brown’s wounds Jan. 23, reaffirming its fiscal 2015 guidance of $8.50 to $9 a share. FDX, which last reported earnings in December, cited a benefit from lower fuel prices that helped fuel EPS growth to $2.14 a share compared to $1.57 a share in the prior year.

But determining which stock is a better bet right now depends on a couple of other factors:

FDX, UPS Valuation

FDX: With a market cap of $48.2 billion, FedEx trades at 16 times forward earnings and has a price-to-earnings growth ratio of 1.1. FDX’s current dividend yield of 0.5% will not capture the focus of income investors, but the stock gained 25% over the past year.

UPS: With a market cap of $90.1 billion, UPS wins the size battle. However, it has a forward P/E of nearly 19 and PEG ratio of 2.27 — both metrics suggest the stock is considerably overvalued now. UPS has a current dividend yield of 2.6%, but the stock’s one-year return is only about 3%.

Winner:  FDX — Brown’s higher multiple and PEG ratio make the stock look expensive.

FDX, UPS Rate Hikes

Earlier this month, FedEx and UPS both raised rates an average of 5% across their respective business segments. Another key margin booster for the package delivery duopoly: dimensional weight pricing. FDX and UPS have introduced plans to price shipments by size as well as weight — potential sticker shock for shoppers who are used to buying lightweight but larger-size goods like electronics.

Small businesses in particular could face sticker shock when they start receiving invoices from their delivery companies this year and some of them could turn to the U.S. Postal Service. While USPS is raising its rates an average of 3.4% beginning on April 26, it will retain current pricing on domestic Priority Mail and Priority Mail Express for retail and business customers. USPS also has ruled out dimensional pricing, content with weight-based pricing alone.

Winner: UPS and FDX are a push, but USPS could make gains in the small business sector.

FDX, UPS Public Perception

Both delivery giants have dealt with their share of bad PR from ill-behaved drivers. Who can forget the security video of a FDX driver throwing a computer monitor over a gate in 2011? Since UPS and FedEx must hire thousands of seasonal drivers to meet the holiday rush, there are bound to be a few bad apples that give the companies’ operational and PR executives heartburn.

The two worst recent examples were the FDX driver in Houston that stole two French bulldog puppies from their yard, then later abandoned the dogs to wander the streets. The dogs were found and safely returned home; FDX is investigating the incident.

UPS, meanwhile, terminated a seasonal employee after a surveillance video surfaced of the driver throwing a package over a gate and then urinating on the side of the house.

Winner: FedEx, based on its track record of responding to complaints. After the 2011 video went viral on social media, FedEx’s senior vice president of U.S. operations personally made an apology characterizing the incident as “absolutely, positively unacceptable.” The entire trucking sector is facing an acute driver shortage so both delivery companies are somewhat stuck when it comes to improving the performance of seasonal employees.

FDX, UPS Decision

FDX is the better buy for investors right now because it is continuing to expand margins, it is benefiting from lower fuel prices and has a leg up on rival UPS in cost-cutting and fleet modernization efforts.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

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