Is FedEx Stock A Better Pick Over Its Peer?

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We believe FedEx stock (NYSE: FDX) is currently a better pick over its peer UPS stock (NYSE: UPS), given its comparatively lower valuation of 0.5x trailing revenues than 1.4x for UPS. Although this gap in the valuation is largely justified given UPS’ superior profitability and lower financial risk, as discussed below, this valuation gap will likely narrow in favor of FedEx.

If we look at stock returns, UPS, with -13% returns in the last twelve months, has fared better than FedEx, down 26%, and the broader S&P 500 index, down 14%. The logistics stocks have been weighed down due to rising costs. The giant e-commerce surge seen through the lockdown phase of the Covid-19 pandemic is now cooling off, reflected in the delivery volumes and stock prices for e-commerce-related companies.

There is more to the comparison, and in the sections below, we discuss why we think FDX stock will give higher returns than UPS stock in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of FedEx vs. UPSWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

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1. FedEx’s Revenue Growth Is Better

  • FedEx’s revenue growth of 9.4% over the last twelve months is slightly better than 7.1% for UPS.
  • If we look at a longer time frame, both have seen similar growth. FedEx saw its sales rise at an average annual growth rate of 10.7% to $93.5 billion in fiscal 2022, compared to $69.7 billion in fiscal 2019 (The fiscal year for FedEx ends in May), while UPS’ sales grew at an average growth rate of 10.8% to $97.3 billion in 2021, compared to $71.9 billion in 2018.
  • For both companies, revenue growth over the recent years was driven by shelter-in-place restrictions and the spread of the Covid-19 virus, resulting in e-commerce growth. However, this trend is now cooling off, reflecting revenue growth rates and delivery volumes.
  • For perspective, UPS saw a 14.5% rise in ground average daily package volume in 2020, but the growth slowed to 1.6% in 2021. For the nine months ending September 2022, the average daily package volume was down 3.5% y-o-y.
  • Similarly, FedEx has seen a 12% fall in average daily package volume for the six months ending Nov 2022.
  • Our FedEx Revenue Comparison and UPS Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, UPS’ revenue growth over the next three years is expected to be better than FedEx’s. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 4.8% for FedEx, compared to a 6.3% CAGR for UPS, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.

2. UPS Is More Profitable

  • FedEx’s operating margin of 5.3% over the last twelve-month period is much lower than 14.3% for UPS.
  • This compares with a 4.3% operating margin for FedEx in fiscal 2020, and 11.4% for UPS in 2019, before the pandemic.
  • FedEx’s free cash flow margin of 9.9% is also lower than 13.9% for UPS.
  • Our FedEx Operating Income Comparison and UPS Operating Income Comparison dashboards have more details.
  • Looking at financial risk, UPS is better placed among the two. Its debt as a percentage of equity of 13.2% is much lower than 96.6% for FedEx, while its 16.4% cash as a percentage of assets is higher than the 8.0% for the latter, implying that UPS has a better debt position and has more cash cushion.

3. The Net of It All

  • We see that UPS is more profitable and has lower financial risk. On the other hand, FedEx has seen better revenue growth and is trading at a comparatively lower valuation.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe FDX is a better pick among the two.
  • The table below summarizes our revenue and return expectations for FedEx and UPS over the next three years and points to an expected return of 21% for FedEx over this period vs. a 12% expected return for UPS stock, implying that investors are likely to be better off buying FDX over UPS, based on Trefis Machine Learning analysis – FedEx vs. UPS – which also provides more details on how we arrive at these numbers.

While FDX will likely outperform UPS in the next three years, it is helpful to see how FedEx’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities, which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for FedEx vs. Amerco.

With inflation rising and the Fed raising interest rates, among other factors, FedEx stock has fallen 26% in the last twelve months. Can it drop more? See how low FedEx stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Jan 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
FDX Return 8% 8% 1%
UPS Return 2% 2% 54%
S&P 500 Return 2% 2% 75%
Trefis Multi-Strategy Portfolio 7% 7% 237%

[1] Month-to-date and year-to-date as of 1/19/2023
[2] Cumulative total returns since the end of 2016

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