Fedex vs. United Parcel Service: Which Logistic Stock is a Better Choice?
Since the onset of the coronavirus pandemic, the logistics industry has been confronted with increasing disruptions. Jammed ports, high shipping rates, and interrupted shipping routes have made sourcing, manufacturing, and moving goods a challenge.
This challenge has been exacerbated by the massive growth in E-commerce. In 2020, more than $790 billion was spent online with US merchants, which was an increase of 32.4% year over year.
Within the logistics industry, delivery services, such as FedEx (FDX) and United Parcel Service (UPS), have benefitted from the growth of e-commerce in the past year and a half. FDX is up more than 58% since February of 2020 and UPS is up more than 80%. Today, I’ll analyze these two logistics behemoths to identify which of the two is a better choice for your portfolio.
FedEx Corporation (FDX)
FDX provides a portfolio of transportation, e-commerce, and business services through the variety of FedEx brands. The company manages its brands collaboratively while allowing them to operate independently. The company’s segments include FedEx Express, FedEx Ground, FedEx Freight, and FedEx Services.
The company’s stock was mostly flat since the beginning of the year, declining 1.7%, underperforming the iShares US Transportation ETF (IYT), which advanced 11.90% over the same period.
This stable stock performance is surprising given that the sector has benefitted from the pandemic period. FDX’s top-line growth is expected to surge 21.4% in 2021 to $84b and should continue to advance at a healthy pace in 2022, up 8.2% year-on-year to $90.9b.
The company’s net income has been multiplied two fold in 2020 to $1.28b and should accelerate significantly in 2021, up more than 4x to $5.2b, which represents a net margin of 6.23%.
FDX’s balance sheet has also improved. The company has taken advantage of the positive business dynamic to reduce its net debt by 19.4% in 2021 to $13.7b and should continue to do so in the following years. In addition, the company has a tiny leverage ratio of 1.17x in 2022.
The valuation metrics of the company are somewhat cheap for this logistics giant, with a 2022e EV/EBITDA of 7.08x and a 2022e P/E ratio of 12.4x.
United Parcel Service Inc (UPS)
UPS is the world’s largest package delivery company and a premier provider of global supply chain solutions. The company serves the global market for logistics services, which include transportation, distribution, contract logistics, international trade, brokerage services, and ground freight in developed and emerging markets worldwide.
The strong stock performance of UPS shares is due to the solid advance of the company’s bottom-line growth. While UPS is expected to post an impressive net sales growth in 2021, up 12.4% to $95.1b, the parcel company’s net income should skyrocket more than 8x in 2021 to $12.1b, corresponding to a net margin of 12.8% which is nearly double that of FDX. However, UPS’ bottom line is anticipated to decline in 2022, down 16.9% to $10.1b, due to weaker sales growth expected next year, up 2.8% to $97.8b, yet, its net margin should remain stronger than FDX, establishing at 10.4% in the same period.
In addition, UPS’ balance sheet is less leveraged than FDX’s. The company is expected to significantly reduce its net debt in the next three years, which should decline by a yearly rate of nearly 30%. Moreover, analysts are expecting UPS’ net debt to reach $13.59b in 2021, down 27.5% year-on-year, corresponding to a leverage ratio of only 0.91x.
With these strong financials, UPS is trading at a premium compared to FDX, posting a 2022e EV/EBITDA of 11.3x and a 2022e P/E ratio of 16.6x.
I believe FDX is currently a better investment than UPS. FDX’s top-line growth is expected to surge, its net income is forecast to accelerate, and it’s balance sheet has improved. In addition, Wall Street analysts’ average price target for FDX is 36% higher from where it is currently trading.