United Parcel Service, Inc. (UPS) and FedEx Corporation (FDX) are two of the most prominent companies in the transportation and logistics industry. With strong domestic and global supply chain management, and efficient delivery system, UPS and FDX have been accelerating since the pandemic-driven lockdown. This can be attributed to higher business volume from the e-commerce companies, as well as increased demand in shipping as people are increasingly replacing physical shopping with online deliveries.
Both UPS and FDX have grown significantly over the past three years. UPS gained 47.3% over this period, significantly beating FDX’s 24.3% return. However, in terms of year-to-date performance, FDX is the clear winner with an 82.7% gain versus UPS’s 50%. FDX also outperformed UPS over the past year by gaining 88.2% compared with UPS’ 50.5%. But which stock is the better buy now? Let’s find out.
Business Structure and Latest Movements
Though both UPS and FDX have similar business models, the key difference is that UPS has a higher business flow in the ground package delivery, while FDX dominates air freight transportation traffic. Both companies have undertaken multiple steps ahead of the holiday season to tackle the additional demand efficiently.
UPS’ wholly owned subsidiary Ware2Go entered into an e-commerce partnership and agreement with Google Shopping for speedy and free delivery of goods. It also launched on-demand fulfillment through an integrated Vu Technology platform for warehouse management system, order management system, and transportation management system.
FDX plans to increase its average shipping rates by 4.9% within January 2021. Also, the company intends to increase its service efficiency and adapt various technological advancements in its delivery service.
FDX recently started using a lightweight sensor-based logistics device, called SenseAware ID, to ensure efficient tracking and provide customers with real-time updates regarding the location of a package.
FDX optimized its current delivery capacity to account for the expected surge in demand during the holidays by adding extra material handling equipment and automation to 50 of its existing storage facilities, and opened 8 new large package facilities across the country. FDX also opened a foreign Trade Zone location in Texas for dealing with international cargo traffic.
Recent Financial Results
UPS’ consolidated revenue increased 13.4% year-over-year to $20.50 billion in the second quarter that ended June 2020. Adjusted net income rose 8.8% from the same period last year to $1.90 billion, while adjusted EPS grew 8.7% from the year-ago value to $2.13. B2C shipment increased 62.5% over this quarter, owing to surging demand for residential delivery.
FDX reported strong results for the fiscal first quarter that ended August 2020, particularly due to the increase in e-commerce and business services. As many companies have outsourced their delivery requirements to FDX, the company witnessed significant volume growth. Revenue increased 13.5% year-over-year to $19.3 billion during the quarter, while net income rose 67.8% from the year-ago value to $1.3 billion. EPS improved 66.2% from the same period last year to $4.72.
Thus, FDX has an edge over UPS here.
Past and Expected Financial Performance
UPS’ revenue and total assets increased at a CAGR of 6.9% and 16%, respectively, over the past three years. Analysts expect the company’s EPS to increase 13.3% next year, and at a rate of 7.3% per annum over the next five years. Its revenue is expected to grow 9.9% in the about-to-be-reported quarter, 9.1% in the current year, and 4.9% next year.
FDX’s revenue and total assets grew at a CAGR of 5.5% and 16.3%, respectively, over the past three years. Analysts expect its EPS to increase 9% next year, and at a rate of 26.1% per annum over the past five years. The consensus revenue estimates indicate a growth of 10.9% in the current quarter, 10.7% in the current year, and 4.9% next year.
Thus, FDX is in an advantageous position here as well.
UPS’ trailing 12-month revenue is 1.08 times what FDX generates. However, FDX is more profitable with a gross margin of 24.7% versus UPS’ 18.5%.
However, UPS’s ROE and ROA 99.5% and 6.1% compare favorably with FDX’s 9.5% and 2.9%, respectively.
In terms of forward P/E ratio, UPS is currently trading at 24.52x, 39% more expensive than FDX, which is currently trading at 17.64x. UPS is also more expensive in terms of forward PEG ratio (2.67x versus 1.49x) and trailing 12-month price/sales (1.95x versus 1.01x).
Also, in terms of trailing 12-month price to cash flow, UPS’s 14.51x is 43.7% more expensive than FDX’s 10.1x.
Thus, FDX is the more affordable stock.
Both FDX and UPS are rated a “Strong Buy” in our proprietary POWR Ratings system. Here’s how the four components of overall POWR Rating are graded for each of these stocks:
UPS has an “A” for Trade Grade and Buy & Hold Grade, and “B” for Peer Grade and Industry Rank. It is currently ranked #1 out of 9 stocks in the Air Freight and Shipping Services group.
FDX holds an “A” for Trade Grade, Buy & Hold Grade, and Peer Grade, and “B” for Industry Rank. It is currently ranked #2 in the same industry.
Both FDX and UPS are leaders in the shipping and logistics industry, with a huge clientele from various parts of the world. However, at a relatively cheaper valuation, FDX has higher revenue and earnings growth potential which should translate into higher price appreciation. Also, FDX has been more efficient in capitalizing on the pandemic, as reflected by its year-over-year growth in financials in the last reported quarter. Thus, FDX is the better buy here.
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UPS shares were unchanged in after-hours trading Thursday. Year-to-date, UPS has gained 52.69%, versus a 9.52% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...
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