Pick Either UPS Stock Or Its Industry Peer – Both May Offer Similar Returns
We believe UPS stock (NYSE: UPS) and its peer FedEx stock (NYSE: FDX) will offer similar returns in the next three years. Although UPS is trading at a comparatively higher valuation multiple of 1.6x trailing revenues than 0.6x for FedEx, this valuation gap is justified, given the former’s superior revenue growth, profitability, and financial position.
Looking at stock returns, FedEx, with 33% returns this year, has fared much better than UPS stock, up 9%, and the broader S&P500 index, up 7%. There is more to the comparison, and in the sections below, we discuss the possible returns for UPS and FedEx 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 UPS vs. FedEx: Which Stock Is A Better Bet? Parts of the analysis are summarized below.
1. UPS’ Revenue Growth Is Slightly Better
- Both companies posted revenue growth over the recent quarters. Still, UPS’ revenue growth of 3.1% over the last twelve months is slightly better than 1.0% for FedEx.
- If we look at a longer time frame, both are comparable. UPS saw its revenue rise at an average growth rate of 10.8% to $100 billion in 2022, compared to $74 billion in 2019, while FedEx’s sales grew at an average rate of 10.7% to $93 billion in 2022 (FedEx’s fiscal year ends in May), compared to $70 billion in 2019.
- 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, and it was down 2.3% in 2022.
- Similarly, FedEx’s ground average daily package volume surged 23% in 2021 but fell 1% in 2022, and it’s down 8% for the nine months ending Feb 2023.
- Although the big e-commerce surge seen through the lockdown phase of the Covid-19 pandemic is now cooling off, the logistics companies should benefit from their pricing actions.
- Our UPS Revenue Comparison and FedEx 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 5.9% for UPS, compared to a 4.8% 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
- UPS’ operating margin of 13.8% over the last twelve-month period is much better than just 4.7% for FedEx.
- This compares with the 11.4% and 2.6% figures seen in 2019, respectively.
- UPS’ free cash flow margin of 14.1% is also better than 9.6% for FedEx.
- Our UPS Operating Income Comparison and FedEx Operating Income Comparison dashboards have more details.
- Looking at financial risk, UPS fares better with its 12% debt as a percentage of equity much lower than 82% for FedEx, and its 11% cash as a percentage of assets is higher than the 6% for the latter, implying that UPS has a better debt position and more cash cushion.
3. The Net of It All
- We see that UPS has demonstrated better revenue growth, is more profitable, and has a better debt position and more cash cushion. On the other hand, FedEx is available at a comparatively lower valuation multiple.
- 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 FedEx will offer similar returns.
- The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 9% for UPS over this period vs. a 13% expected return for FedEx, implying that investors can pick either of the two, 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 may offer similar returns over the next three years, it is helpful to see how UPS’ 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, UPS stock has fallen 3% in the last twelve months. Can it drop more? See how low UPS stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stores 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||0%||7%||83%|
|Trefis Multi-Strategy Portfolio||-3%||5%||230%|
 Month-to-date and year-to-date as of 4/6/2023
 Cumulative total returns since the end of 2016
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