UPS Vs. FedEx: Two Plays on (Eventual) Global Recovery – Only One That’s Low-Priced
E-commerce is helping to fuel revenues and profits at UPS (UPS), albeit at lower rates, and enabled it to announce earnings of 48 cents a share yesterday, and profits of $1.06 a share after one-time items, right in line with analysts’ expectations. That’s one bit of good news, and there was another, in the shape of a report that international shipping grew during the quarter, thanks to the fact that more of us are ordering new electronic gadgets that are being shipped to us from Asia.
Is that enough of a reason to snap up UPS shares? Certainly, some folks thought so briefly yesterday, when the stock rallied on the earnings report even though profits marked a decline from year-earlier levels. The problem is that while shipping the stuff that we buy on eBay (EBAY) or order from Amazon.com (AMZN) helps increase volumes, margins on those transactions tend to be rather thin. Add higher fuel costs during the quarter, and you’ve got a recipe for lower margins: indeed, UPS reported that its operating margins fell to 5.9% from 12.7%.
That’s still enough to make UPS look more attractive than its smaller rival, FedEx (FDX), whose profit margins thus far haven’t been contracting, but have remained several percentage points below those of UPS for much of the economic recovery.
Still, before you hit the ‘buy’ button, there are a few other factors to contemplate. While FedEx’s margins may look anemic, and while its management has recently rattled markets with bearish forecasts about the fourth quarter, it also is taking steps to bring costs in line with those lower revenues, betting that customers who have switched from express air freight to shipping via sea or land won’t return rapidly to spending more even if the economy improves. FedEx CEO told a dinner audience earlier this month that cost cutting will boost the company’s profits by $1.7 billion over the next four years.
There are a few other reasons you might want to consider hedging your bets by allocating some capital to FedEx, beyond simply calculating that it’s a good way to play a possible global recovery or the success of these cost-cutting measures. A straightforward consideration is valuation: FedEx trades at about the same trailing 12-month PE ratio as the S&P 500; UPS is significantly more expensive, with much of the good news and more upbeat outlook already priced into the stock. (That may be one reason why the stock ended up forfeiting its early gains yesterday and ending the day down about 0.8%.).
As with so many companies in the S&P 500, revenue growth has been a problem for both FedEx and UPS, but it appears to have been more of a problem for UPS, when revenue growth is calculated on a quarterly, year-over-year basis.
Another key metric to keep an eye on is quarterly cash from operations. At FedEx, it has been volatile but over time has remained little changed, while it is declining at UPS.
Neither company is likely to be a stellar market outperformer as long as the global economy seems determined to stumble along rather than grow. Both may well see a seasonal uptick, especially if there are positive surprises from same-store sales this month and next (indicating that consumers are ready to spend heavily during the holiday season) but without the benefit of holiday spending next week, it may be worth considering sticking with the aggressive cost-cutter with the lower valuation.
Suzanne McGee is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.
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