Pick Either UPS Stock Or Its Peer – Both May Offer Similar Returns
We think FedEx stock (NYSE: FDX) and UPS stock (NYSE: UPS) may offer similar returns over the next few years. Still, FedEx looks more attractive due to its comparatively lower valuation. FDX stock is trading at 0.6x trailing revenues, compared to 1.4x for UPS. However, this gap in the valuation is largely justified given UPS’ superior profitability and lower financial risk, as discussed below.
If we look at stock returns, UPS’ 6% return is better than a -17% change for FDX stock over the last twelve months. This compares with a -6% change in the broader S&P 500 index. FDX stock has been weighed down due to rising costs. The big e-commerce surge seen through the lockdown phase of the Covid-19 pandemic is now cooling off, which is reflected in revenue growth rates and stock prices for e-commerce-related companies. Despite an upbeat Q2 performance, UPS stock also fell post the results announcement, primarily due to a y-o-y decline in the U.S. domestic deliveries.
There is more to the comparison, and in the sections below, we discuss the possible stock returns for UPS and FDX in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of UPS vs. FedEx: Which Stock Is A Better Bet? Parts of the analysis are summarized below.
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1. The Revenue Growth Has Been Similar For Both The Companies
- UPS’ revenue growth of 34.6% over the last twelve months is much better than 10.7% for FedEx.
- However, if we look at a longer time frame, UPS’ sales grew at an average growth rate of 10.8% to $97.3 billion in 2021, compared to $71.9 billion in 2018, while that of FedEx also grew at a similar rate of 10.7% to $93.5 billion in fiscal 2022, compared to $69.7 billion in fiscal 2019 (Fiscal for FedEx ends in May).
- For both the 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, aiding its ground shipments. However, this trend is now cooling off, reflecting revenue growth rates and delivery volumes.
- Our UPS Revenue and FedEx Revenue dashboards provide more insight into the companies’ sales.
- Looking forward, UPS’ revenue growth over the next three years is expected to be slightly 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 6.9% for UPS, compared to a 5.0% CAGR for FedEx, 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 in the 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, And It Offers Lower Risk
- UPS’ operating margin of 11.3% over the last twelve-month period is much better than just 5.8% for FedEx.
- This compares with 11.4% and 2.6% figures seen in 2019, before the pandemic, respectively.
- UPS’ free cash flow margin of 12.2% is also better than 10.6% for FedEx.
- Our UPS Operating Income and FedEx Operating Income dashboards have more details.
- Looking at financial risk, UPS is better placed among the two. Its debt as a percentage of equity of 12% is much lower than 80% for FedEx (with total debt of $24 billion for UPS vs. around $37 billion for FedEx), while its 15% cash as a percentage of assets is higher than the 8% for the latter (with cash in hand of over $12 billion for UPS and $7 billion for FedEx), implying that UPS has a better debt position and has more cash cushion.
3. The Net of It All
- We see that UPS and FDX have demonstrated similar revenue growth over recent years. However, UPS is more profitable and offers a comparatively lower financial risk with better debt and cash position, explaining the valuation gap between the two companies.
- Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe both UPS and FDX are likely to offer similar returns over the next few years.
- The table below summarizes our revenue and return expectations for UPS and FedEx over the next three years and points to an expected return of 17% for UPS over this period vs. an 18% expected return for FDX stock, implying that investors can choose either of the two or both if they are looking to invest in the transportation sector, based on Trefis Machine Learning analysis – UPS vs. FedEx – which also provides more details on how we arrive at these numbers.
While UPS and FDX stocks look like both can see higher levels, it is helpful to see how UPS’ Peers and 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 how counter-intuitive the stock valuation is for FedEx vs. Amerco.
With inflation rising and the Fed raising interest rates, among other factors, UPS stock has fallen 5%, and FedEx stock has fallen 12% this year. Can they drop more? See how low UPS stock can go and 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.
|S&P 500 Return||2%||-12%||88%|
|Trefis Multi-Strategy Portfolio||6%||-8%||261%|
 Month-to-date and year-to-date as of 8/12/2022
 Cumulative total returns since the end of 2016
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