In this piece, I evaluated two logistics stocks, United Parcel Service, Inc. (UPS) and FedEx Corporation (FDX), to determine which one is a better investment. I believe FDX is the better buy for the reasons explained throughout this article.
Since last year, high inflation and the Fed’s interest rate hikes have taken a toll on consumer sentiment. However, consumer spending rose 0.2% in February as inflation cooled for the eighth consecutive month in February.
During the pandemic, logistics companies had their hands full as deliveries skyrocketed amid the forced shutdown of businesses by the government. Orders from e-commerce sites helped logistics companies generate outsized revenues and earnings during the period.
Higher profits were also aided by the higher prices implemented by logistics companies to protect their profits as the pandemic had hit their high-margin shipments between businesses.
However, the post-pandemic world saw softening of e-commerce volume, with consumers cutting down on their expenses due to the high inflation. The delivery boom of the pandemic faded last year, leading FDX and UPS to report weaker revenue and earnings. The challenging macroeconomic environment hit the businesses of the two logistics majors.
Despite the shipping slowdown, FDX expects adjusted profit for fiscal 2023 to come between $14.60 and $15.20 per share. This is up from the previous projection of between $13 and $14. The company’s EPS came 67 cents higher than analyst estimates in the third quarter.
UPS saw record profit in the fourth quarter ended December 31, 2022. However, it missed revenue estimates as international and supply chain segments saw volumes decline. UPS expects its fiscal 2023 revenue to come between $97 billion to $99.40 billion. It also expects an adjusted operating margin of between 12.8% to 13.6%.
The company guided that annual revenue could decline for the first time since 2009. Its fiscal 2023 revenue estimates were below analyst expectations.
FDX is a clear winner when it comes to price performance. FDX’s stock has gained 51.1% over the past six months in comparison to UPS’ 18.3% gain. In addition, FDX’s stock has gained 29.6% in price year-to-date, higher than UPS’ 9.9% gain.
Here are the reasons I think FDX could perform better in the near term:
Latest Developments
On November 16, 2022, UPS announced that it had closed the previously announced acquisition of healthcare logistics provider Bomi Group.
UPS International’s Healthcare and Supply Chain Solutions’ Executive Vice President and President Kate Gutmann said, “Our combined team, vehicles, and advanced facilities will allow us to expand our pan-European cold chain network and bring the next generation of healthcare logistics solutions to our customers.”
Ethisphere recently recognized FDX as one of the World’s Most Ethical Companies in 2023. FDX’s Chief Compliance Officer said, “Our FedEx team members around the globe have done an incredible job building and maintaining FedEx’s strong culture of compliance and ethics, and we are truly appreciative of this esteemed – and hard-earned – recognition.”
Recent Financial Results
UPS’ total revenue decreased 2.7% year-over-year to $27.03 billion for the fourth quarter ended December 31, 2022. Its adjusted operating profit decreased 3.3% year-over-year to $3.82 billion. The company’s adjusted net income rose marginally over the prior-year period to $3.15 billion. In addition, its adjusted EPS came in at $3.62, representing an increase of 0.8% year-over-year.
For the fiscal third quarter ended February 28, 2023, FDX’s total revenue decreased 6% year-over-year to $22.17 billion. Its non-GAAP operating income declined 20.3% year-over-year to $1.17 billion. The company’s non-GAAP net income declined 28.9% over the prior-year quarter to $865 million. Its non-GAAP EPS came in at $3.41, representing a decline of 25.7% year-over-year.
Expected Financial Performance
Analysts expect UPS’ EPS and revenue for fiscal 2023 to decline 11.6% and 2.1% year-over-year to $11.45 and $98.19 billion, respectively. Its EPS and revenue for fiscal 2024 are expected to increase 7.1% and 3.7% year-over-year to $12.26 and $101.84 billion, respectively. Its EPS and revenue are expected to decline over the next three quarters.
For fiscal 2023, FDX’s EPS and revenue are expected to decline 27.6% and 2.6% year-over-year to $14.92 and $91.07 billion, respectively. Its EPS and revenue for fiscal 2024 are expected to increase 20.2% and 0.8% year-over-year to $17.94 and $91.83 billion, respectively. Its EPS for the quarter ending August 2023 is expected to increase 17.5% year-over-year to $4.04.
Profitability
UPS’ revenue is 1.08 times what FDX generates. Moreover, UPS is more profitable, with an EBITDA margin and net income margin of 16.91% and 11.51%, compared to FDX’s 9.84% and 3.23%, respectively. Also, UPS’ levered FCF margin of 8.16% is considerably higher than FDX’s 0.63%.
Valuation
In terms of forward non-GAAP PEG, FDX is currently trading at 1.52x, 59.2% lower than UPS’ 2.42x. FDX’s forward EV/Sales ratio of 0.98x is 86.7% lower than UPS’ 1.83x. Likewise, FDX’s forward EV/EBITDA of 9.43x compares to UPS’ 11.07x.
Thus, FDX is relatively more affordable.
POWR Ratings
FDX has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, UPS has an overall rating of C, translating to a Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. FDX has an A grade for Sentiment, in sync with its favorable analyst estimates. UPS’ mixed analyst estimates are consistent with its C grade for Sentiment.
Both FDX and UPS have a B grade for Quality. FDX’s 7.35% trailing-12-month Capex/Sales is 159.9% higher than the 2.83% industry average. Its 1.09x trailing-12-month asset turnover ratio is 36.5% higher than the 0.80x industry average.
UPS’ 8.16% trailing-12-month levered FCF margin is 110.9% higher than the 3.87% industry average. Its 16.91% trailing-12-month EBITDA margin is 27.3% higher than the 13.29% industry average. On the other hand, its 25% trailing-12-month gross profit margin is 14.7% lower than the 29.29% industry average.
Of the 16 stocks in the Air Freight & Shipping Services industry, FDX is ranked #5, while UPS is ranked #9 in the same industry.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Value, Momentum, and Stability. Click here to view FDX ratings. Get all the ratings of UPS here.
The Winner
Logistics are an integral part of our economy, and FDX and UPS are major players helping move goods worldwide. As demand returns to pre-pandemic levels again, these logistics players are expected to see profits normalizing. FDX and UPS are expected to gain as volumes start picking up again.
FDX is a better choice than UPS as it aims to shave more than $4 billion in costs by fiscal 2025. Despite the uncertain macroeconomic environment, FDX updated its outlook for fiscal 2023. Also, in terms of valuation, FDX is cheaper than UPS.
UPS expects its annual revenue to decline for the first time since 2009. Its revenue estimates for fiscal 2023 were lower than analyst estimates. This could keep the stock under pressure.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy or Buy. View all the top-rated stocks in the Air Freight & Shipping Services industry here.
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UPS shares were trading at $192.27 per share on Friday afternoon, up $1.18 (+0.62%). Year-to-date, UPS has gained 11.58%, versus a 6.91% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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