Despite disappointing job data and slipping consumer confidence, package delivery giants UPS (NYSE:UPS) and FedEx (NYSE:FDX) are still bullish on shipping volume growth this year. After all, e-commerce sites are fast becoming the 21st century American shopping mall and globalization is creating new opportunities, particularly in China.
Consider the U.S. Postal Service a diminished competitor – it hemorrhaged $8.5 billion in cash last year, plans to cut Saturday service and still can’t make the numbers work. That’s why Republican presidential hopeful Tim Pawlenty this week declared that the government should get out of the mail delivery business because the private sector has got it covered. And by private sector, he means the UPS/FedEx duopoly.
Of course it’s easy to see that the FedEx and UPS business models are delivering a knockout punch to the traditional mail carriers. But which company’s stock is the better bet for investors? Let’s break down the numbers:
FedEx:
- Earnings: In March, FedEx reported third-quarter revenue of $9.66 billion, up 11% from a year earlier. However, the company’s operating income slipped 6%, operating margins fell and net income was down 3%. Higher costs, including fuel, maintenance, merging its freight and less-than-truckload operations and a $66 million reserve to cover damages in a breach of contract lawsuit were said to be responsible. The company is set to release its fourth-quarter and full-year earnings next week.
- Key Stats: At $86.81, FedEx is trading at a little more than 24% higher than its 52-week low of $69.78 last July. The company just raised the stock’s dividend by a penny to 52 cents, which translates into a 0.6% yield. FedEx has a market cap of $24.5 billion and share prices are running about 6% below 50-day and 200-day moving averages. FedEx has a price-to earnings ratio of 20.86 and a forward P/E of 13.31.
- Edge: Speed is FedEx’s best friend – it leads the market in express delivery and those operations account for more than half the company’s revenue. The company also is aggressively positioning itself to grow through commitment to global markets. FedEx is investing in leaner-burning Boeing (NYSE:BA) 777s to reduce the impact of fuel costs. It also is trying to squeeze costs out of its infrastructure. Although FedEx took an earnings hit on the integration of the company’s LTL and freight operations, the long-term efficiencies should help boost its competitive position down the road.
UPS:
- Earnings: UPS reported first-quarter revenue of $12.6 billion, up 7% from last year. More significantly, operating income jumped by 24%. Operating margin also increased to 11.3%, up from 8.9% for the same quarter last year.
- Key Stats: At $60.06, UPS is trading a little more than 22% higher than its 52-week low of $56.47 last July. The company pays a solid annual dividend of $2.08 (delivering a yield of 3%). The stock is a little more than 5% below the stock’s 50-day and 200-day moving averages. UPS’ P/E ratio is 18 and its forward P/E is 13.8.
- Edge: Never underestimate the power of being the biggest boy on the block. UPS is the global leader in small-package transport, delivering some 15 million packages a day. The company’s logistics and supply chain management operations offer a strong competitive advantage, particularly in the freight sector. The company has a strong track record in managing fuel costs through surcharges. While UPS has the power position in the U.S., its biggest future opportunity will be in global markets. Since Dutch competitor TNT split up its express and mail operations last month, UPS has a shot at scoring a big win if it can manage to acquire TNT Express. A deal would boost UPS’ European presence and enhance the company’s competitive position in that time-sensitive segment. FedEx is eyeing the opportunity as well.
Pick: UPS. While some analysts contend that the stock is oversold, the prospect of strengthening economic factors later in the year bodes well for UPS. The company’s earnings growth is stronger than that of rival FedEx, its competitive position in the growth are of logistics and supply chain management is solid and it has demonstrated an ability to aggressively manage costs. Add to that the 3% dividend yield, and this is one package stock that is likely to keep delivering.
As of this writing, Susan J. Aluise did not hold an interest in any stocks mentioned here.
