2023-06-20 23:01:25 ET
Summary
- FedEx appears to be underpriced relative to UPS.
- UPS has better EBITDA and FCF metrics.
- FedEx dividends are growing at twice the CAGR of UPS dividends.
- UPS could be facing a devastating union strike on August 1.
Overview
United Parcel Service, Inc. ( UPS ) and FedEx ( FDX ) are two of the largest package delivery services in the world by MV (market value). UPS is based in Atlanta, GA and FedEx is headquartered in Memphis, TN.
From an MV point, UPS is the largest followed by FedEx and Deutsch Post.
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Both companies were less than successful in 2022 but potentially lower gas prices in 2023 could help their bottom lines.
Looking at the Total Return basis (including dividends) over the last year, the S&P 500 ( SPY ) has done much better than either UPS or FedEx.
In this article, I will compare both companies to determine which one or both presents the best investment opportunity going forward.
Here are four points to consider before investing in either UPS or FedEx.
1. Financial metrics
When we look at the financial metrics comparing the two companies on a TTM (Trailing Twelve Month) basis, several metrics jump out indicating how underpriced FDX is versus UPS.
Looking at UPS and FDX individually, they have performed quite differently over the last 12 months.
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The first item of interest is the Price/Sales ratio (Line 3) where FDX's ratio is less than 1/2 of UPS's. This could imply that FDX is underpriced compared to UPS.
Moving on to Gross Margin % (Line 5) shows both are about the same with UPS at 25% and FDX at 24%.
But looking at GM% to market value (Line 8) you can see that FDX is much higher indicating that FDX may be undervalued compared to UPS.
Looking at gross margins over the last 10 years FDX has generally shown slightly better margins than UPS.
Other financial metrics of interest include EBITDA (line 13) and Debt/EBITDA (Line 14) which show much better numbers for UPS than FDX.
When it comes to FCF (Line 15) UPS also shows a huge advantage with more than 3x the FCF of FDX. UPS also has a better Price/FCF (Line 16)
And finally, in terms of dividend rate (Line 18), UPS shows a better rate at 3.6% compared to FedEx's 2.2%.
Advantage: UPS
2. What do analysts think?
Looking at how Wall Street analysts have rated the two shows FDX with a slight advantage with only 1 Sell recommendation compared to UPS's 3 Sells including one Strong Sell. UPS, on the other hand, looks pretty good too with 20 Buys despite the three Sell recommendations.
Also, note both companies have a lot of Hold ratings (32 total) indicating indecision on the part of many analysts.
Regarding the quants, they currently have both UPS and FDX rated as Hold. But almost a year ago, FedEx actually had a Buy rating from the quants.
For some reason, the quant algorithms have been unable to find a reason to buy either UPS or FDX.
Advantage: Neither
3. Share buybacks are a priority for both companies
Both companies have consistently bought back shares over the last 10 years.
FDX has bought back 16% of its shares and UPS 8% of its shares over that time period.
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Advantage: FedEx
4. Dividend history
UPS has increased its dividend for 13 straight years an excellent record.
FDX, on the other hand, has only raised its dividend for the last two years, having frozen it during the COVID-19 crisis.
But over the last 10 years, FDX has raised its dividend by an average of 26% per year compared to UPS's 10% per year. That garners FDX with an A- rating for dividend growth.
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So looking at all the factors I rate them equal in dividend policy although UPS does have a higher current rate (3.6% to 2.2%) and a longer period of raises (13 years to 2 years). But FDX has a much higher 10-year dividend increase CAGR.
Conclusion
Looking forward, the risks to both companies include the ongoing increase in interest rates, a slowing economy, and the potential for higher gasoline costs if oil prices go up in the 2nd half of the year due to increased demand from China and production cutbacks by OPEC.
On the other hand, oil prices are down considerably over the last 12 months, dropping from about $110 a barrel to about $71, which should benefit both companies with lower operating costs.
Comparing UPS to FedEx shows significant differences, especially in the area of financial metrics.
UPS shows superior EBITDA, FCF, and dividend rate compared to FDX. Also, UPS and FDX show a difference in share buyback allocations with FDX buying back at a significantly higher CAGR than UPS over the last 10 years. Also, FDX looks underpriced relative to UPS when comparing the Price to sales ratio.
In addition, UPS is also facing a potential strike by their union workers with 97% of union members voting to strike if no deal is reached by August 1.
The members at the country’s largest delivery service voted 97% in favor of authorizing a strike to start on August 1, if there is no agreement in contract talks now taking place between the company and the union. The Teamsters represent more than 340,000 UPS logistics warehouse workers and package delivery drivers nationwide. Source: CNN Business
FDX stock is a Buy due to its superior dividend policy and its commitment to decreasing the share count.
UPS stock is a Hold until the union strike situation is resolved.
For further details see:
UPS Vs. FedEx: Which Will Deliver Better Results For Investors?