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As consumer spending cools, the major logistics stocks seem like easy sells right here, especially if you think an economic recession is afoot. Shares of UPS (UPS) and FedEx (FDX) were dealt a punishing blow last year. And though FDX has been riding higher of late on the back of a solid quarterly report, I think both logistics companies are terrific buys for the long haul.
When it comes to artificial intelligence (AI) stocks, a shipping company like UPS or FedEx probably doesn't come to mind first. Undoubtedly, generative AI has been all the rage this year. And though AI tech could certainly help to keep customers in the know as their packages are on the move, I think AI - and automation robotics, in particular - is a powerful force that could give logistic firms a sustained margin boost over the course of the next decade.
Indeed, robots aren't going to replace humans anytime soon. However, I do think there's a great incentive to introduce helpful automation technologies in the warehouse to minimize workplace injuries and meet potential labor shortcomings. Further, autonomous trucking is also a place where firms like UPS and FedEx could really take their businesses to the next level.
The business of transportation and supply chain management can be tricky and costly. If the COVID-19 pandemic taught us anything, it's that heck can really break loose if there's an issue in the supply chain. Even a small supply chain hiccup can have far-reaching consequences.
With the rise of various AI technologies, though, these issues can be kept to a minimum.
Let's have a closer look at two logistics stocks that I view as great buys today. Though the incorporation of AI tech in the warehouse and transport industries could take many years (even decades), I don't think current valuations reflect the potential margin savings to be had.
UPS
UPS stock has had a rather uneventful past year, with shares down more than 11%. The company recently struck a five-year labor deal with the Teamsters to avoid what would have been a potentially crippling strike. As a result of the deal, headlines about UPS drivers earning more than $170,000 annually were making waves. Indeed, that's an incredible sum that's garnered quite a bit of attention and applicants!
Though being a driver for UPS may seem like the opportunity of a lifetime right now, I do think that autonomous driving could be in the cards by the end of the decade. Indeed, we may be five years or so away from self-driving UPS trucks. The company certainly has the incentive to automate, given how pricy it is to retain a driver.
Following the big UPS-Teamsters deal, it looks like the consumer will need to pay more to get their parcels delivered with UPS. Higher shipping rates could easily curb consumer spending over the medium term.
In any case, UPS stock stands out as a terrific value play at just 14.9 times trailing price-to-earnings (P/E), which sits below the integrated freight & logistics industry average of 16.72 times. With a solid 3.8% dividend yield and a compelling longer-term roadmap that could see greater autonomy over the next 10-15 years, I wouldn't hesitate to buy the stock here - even if it is a bit of a falling knife!
FedEx
As UPS shares sagged, FedEx stock has been climbing sharply higher, with shares now up over 79% since their October lows. The company has some union workers, but most of the labor force isn't tied to a union. In that regard, FedEx is probably enjoying where it sits now relative to UPS.
Though FedEx has been faring better than UPS as of late, it's still felt the headwinds caused by lower package volumes. As a result, many of its cargo jets have been grounded. Until the economy bounces back and the consumer is ready to bring out the credit card, it'll probably continue to be a turbulent time for FedEx.
In the long term, FedEx also stands to benefit from the rise of autonomous vehicles and warehouse robotics. E-commerce behemoth Amazon (AMZN) already has incredible robots hard at work in its warehouses. As the number of robot employees increases, across the supply chain, the number of human workers is bound to decrease. In this regard, I think it's just a matter of time before logistics pure-plays like UPS and FedEx get up to speed with the likes of Amazon.
At 17.1 times trailing price-to-earnings, FDX stands out as a great bargain that could make a run for new highs.
Conclusion
Logistics stocks may come under further near-term pressure as consumers look to curtail spending. Still, valuations are attractive today, and I do think the long-term runway afforded by broader industry AI adoption is misunderstood by investors.
On the date of publication, Joey Frenette did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
