Packaged profits: UPS vs. FedEx

Posted Feb 9th 2007 1:05PM by Steven Halpern
Filed under: Newsletters, FedEx Corp (FDX), United Parcel'B' (UPS)

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

Print this

Reader Comments (Page 1 of 1)

2-09-2007 @ 11:47AM

John Koutsos said...

If you think UPS is profitable now, just wait until the full effects of their new dimensional weight policy reflect to the bottom line. UPS has eliminated tier pricing for oversized ground packages and has gone strictly to a dimensional weighting formula effective Jan 07. End result is a huge price increase that affects average size packages. Down side to the stock is they are inviting competition through excessive prices.

2-09-2007 @ 12:34PM

Michael Cummings said...

They charge more then UPS

2-09-2007 @ 2:39PM

Michael Cummings said...

Fed Ex exploits it's employee's.

2-12-2007 @ 3:27PM

chickenman said...

i have been sitting on ups stock for many years ,and it does nothing but fluctuate up and down between 70 and 80 dollars,not gaining me much profit.this is due to the companys overall control of the stock,they can make it rise and fall at their own needs and or descretions. it is time again to split and double. this will make it more affordable to purchase on the market.

2-09-2007 @ 2:36PM

LS MELDON said...

Just wait and see what happens to the value of UPS stock once the share holders find out exactly how many law suits are being brought against UPS by their franchisee's Mail Boxes Etc. & The UPS Store...food for thought

2-09-2007 @ 4:46PM

mbezion said...

Not only the 3 lawsuits but also The Certification of Class under appellate review now. Will be interesting to see what UPS does if and when Tupss win their certification and can move forward with the class action suit.

2-10-2007 @ 7:30AM

tim said...

With all respect to Mr. Slaughter he should not comment in areas he has no knowledge. Teh B2C segment of the industry is by far less profitable than the b2b segment in transportation. Event he disparity in rates does not offset the operating cost. The real advantage UPS has is in its integrated operating network vs FedEx independant comapany approach. The mitigating factor is labor costs. This is also evident in the "teamster like attitude" of the MBE franchisee's, who's greed blinds them to market realities of lower cost competing models. Stick to transport analysts for stock reviews on transport companies....

2-10-2007 @ 1:11PM

ed said...

I wish Mr Slaughter would check his math & define what he means by "Market Thumping returns for Shareholders". Yes UPS has shown record profits over the last 8 yrs but here are the FACTS; in that same term UPS stock Nov 11th, 1999 = $75, Feb 10th, 2007 = $73.56...the only thing thumping is our future! what can brown do for you??????????

2-12-2007 @ 2:09PM

Shipperdon said...

What everyone is missing is the long term growth that built UPS including their stock splits BEFORE they went public. What a great year for a split AND dividends during their celebration of their 100th anniversary.
shipperdon

3-05-2007 @ 11:41PM

HILARIO said...

FedEx may have some turbulant times ahead, seeing as one location in Boston has unionized. As a UPS driver myself and close friend of a FedEx Ground driver, he truly gets the short end of the stick from management and are looking to organize in Chicago. Just a little heads up.