UPS and UNP: One Has Upside, Though Both Move Things…

by Trefis Team
Rate   |   votes   |   Share

United Parcel Service (NYSE:UPS), the world’s largest parcel delivery company, has seen its stock price fall roughly 10% in the last few years. In comparison, Union Pacific (NYSE:UNP), one of the world’s largest railroad companies, has seen its stock grow by 35% during the same period. This comes despite the fact that UPS’ revenue growth was over 5x higher at 12.5%, compared to a mere 2.2% for Union Pacific. Though Union Pacific’s margins expansion was much higher at 28% vs 5% for UPS between 2016 and 2019, and this likely explains the stock’s previous growth, looking ahead we believe UPS is a better bet in the transportation sector at the moment, compared to Union Pacific. Our dashboard, ‘UPS vs. UNP: Does The Stock Price Movement Make Sense?‘, has the underlying numbers.

Fundamentals For Both Companies Are Strong, But UPS’ Valuation And Outlook Is Attractive

Let’s look at the core business prospects of both companies a little more closely. UPS, which delivered 4.7 billion packages in 2019 compared to 3 billion for FedEx and 2.5 billion for Amazon, is clearly the largest player in package delivery. The company has seen 12.3% volume growth and 7.3% ARPU growth, resulting in a strong 20% revenue growth for its largest segment (45% of total revenue), Ground, between 2016 and 2019. Despite strong growth, the company’s valuation has dropped over the last few years, amid pricing concerns over Amazon, its largest customer. Amazon has been a high volume low margin customer for UPS. However, UPS itself has been busy upgrading its facilities to reduce delivery time and costs, and it appears to be in a good position to improve its margins. Also, the recent pandemic has shifted demand for online sales even higher, which will bolster UPS’ e-commerce business.

Union Pacific is one of the largest railroad companies in the world in terms of market capitalization. The company transports carloads of energy, agricultural, automotive, and industrial commodities connecting 23 states in the western two-thirds of the U.S. While Union Pacific has seen steady growth for most of its segments over the recent years, the energy segment has been a drag with coal shipments on a decline. This is a trend seen across the railroad companies with lower natural gas prices pushing the demand for coal lower, and the production in the U.S. also falling to multi-year lows. This trend is expected to continue in the near term, and with oil prices falling to multi-year lows, the demand for oil related shipments, including chemicals and frac sand, is expected to be lower in the near term.

But then what’s driving the stock price growth for Union Pacific? There could be a couple of factors impacting Union Pacific’s valuation, versus UPS. Union Pacific’s margins of 27% are 3x that of 9% for UPS in 2019. Note that UPS’ business has traditionally been a low-margin business. The important metric to look at is the margin expansion. Union Pacific’s margin expanded 600 bps from 21.2% in 2016 to 27.3% in 2019, compared to a mere 40 bps expansion from 8.4% to 8.8% for UPS over the same period.

While this explains the outperformance of Union Pacific over UPS, we still believe UPS’ valuation looks quite attractive compared to Union Pacific. UPS trades at just 13x its 2019 adjusted EPS of $7.53, compared to 21x for Union Pacific’s EPS of $8.38. UPS’ P/E Multiple has declined roughly 25% from 18x at the end of 2016 to 13x currently, vs. 10% growth for Union Pacific’s P/E Multiple from 19x to 21x over the same period.

Looking for more transportation insights? See – Why Is There A Mismatch In The Rate At Which FedEx’s Revenues And Stock Price Have Changed? and Oil & Gas To Lead A 20% Drop In Union Pacific’s Energy Freight In 2020?

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams

Rate   |   votes   |   Share


Name (Required)
Email (Required, but never displayed)
Be the first to comment!