Which is the better value -- FedEx Corp (NYSE:FDX) or United Parcel Service (NYSE:UPS)? Value investor Nathan Slaughter, editor of Half-Priced Stocks, looks into both package shipping firms to determine which one is likely to pack more profits in your portfolio.
According to Slaughter, when it comes to a long heritage UPS is the winner. The firm was started back in 1907 by a teenager named Jim Casey, who borrowed $100 to launch a delivery service in Seattle that has since become a global powerhouse.
The advisor explains, "With a ground fleet of 100,000 vehicles (mostly those familiar brown vans), the firm delivers a staggering 15 million packages per day, with annual deliveries now approaching the 4 billion mark."
FedEx, on the other hand, is a relatively "new" player, having begun its operations in 1973. Nevertheless, Slaughter notes, "FedEx virtually invented overnight deliveries and now boasts a fleet of almost 700 aircraft that carry 3.3 million packages every day."
Meanwhile, the advisor cautions that both companies are cyclical, and their growth prospects are often tied to the overall health of the economy. In fact, he notes, even the Federal Reserve keeps track of their internal metrics as a proxy to gauge how well the economy is faring.
Both companies, he believes, will benefit from the growth of online sales, as more consumers around the world continue to "embrace the Internet as a transaction medium." Indeed, he notes, "Package delivery giants like UPS and FedEx stand to benefit more than most thanks to steadily rising shipping demand."
Overall, he notes, FedEx now dominates the air, while UPS rules the ground. On this count the advisor gives UPS the edge, noting that while FedEx maintains the lead in business-to-business express deliveries, UPS's business-to-consumer segment is the more profitable and larger of the package delivery markets.
Is there a winner between the two? Notes Slaughter, "Business should remain plentiful enough to keep both companies busy, and each has delivered market-thumping gains for shareholders over the past five years -- and could do the same over the next five."
He believes both stocks have attractive characteristics that should translate into above-average gains for shareholders. Nevertheless, he admits, "We think UPS has more to offer at this point. Not only is 'brown' bigger, but in many cases it is also simply better."
The advisor explains, "UPS is far more profitable, and its margins have consistently remained well above those at FedEx. In fact, the firm's margins and free cash flow generation are both at the top of the entire industry."
According to Slaughter, that free cash flow has enabled UPS to maintain a "rock-solid" balance sheet, which has earned a coveted AAA rating from leading credit agencies.
Further, he notes, "UPS is simply more efficient, boasting much higher returns on equity (ROE), as well as solid returns on invested capital approaching 20%." These returns, he notes, allowed the company to "repurchase 32 million shares last year, pay $1.7 billion in dividends and still plow $3.1 billion back into the business."
And, he notes, with $2 billion in cash on the books, "ramped-up share repurchases and/or another dividend hike could be on the horizon."
Slaughter concludes, "UPS shares are the better buy at this point, trading at a hefty 18% discount to fair value -- more than double the 8% at FedEx. All things considered, either of these stocks could deliver for shareholders in the years ahead, but UPS has a better shot at arriving at that destination first."
Steven Halpern's TheStockAdvisors.com is a free, daily website which offers the latest stock ideas from the nation's leading financial newsletters