Despite widespread macro headwinds, lucrative federal investments in the U.S. transportation infrastructure are expected to bode well for the freight and logistics industry, which possesses a significantly positive outlook. FedEx (FDX) and United Parcel Service (UPS) are slated to be primary beneficiaries. But which of these stocks is the better buy now? Let’s find out….
FedEx Corporation (FDX) provides transportation, e-commerce, and business services internationally and internationally. Its segments are FedEx Express; FedEx Ground; FedEx Freight; FedEx Services; and Corporate- Other and Eliminations.
On the other hand, United Parcel Service, Inc. (UPS) provides letter and package delivery, transportation, logistics, and related services. Its two segments are U.S. Domestic Package and International Package.
As aggregate demand continues to decline amid widespread macro headwinds, freight rates are witnessing a palpable downtrend with reduced global trade volumes. However, supply chain bottlenecks have improved. Moreover, lucrative federal investments in transport infrastructure are expected to foster growth in the freight and shipping industry.
On September 19, 2022, the U.S. Department of Transportation announced approximately $160 million annually for the next five years to boost and revamp the country’s transportation infrastructure with advanced technology. In addition, according to ReportLinker, the global freight and logistics market is projected to grow at a CAGR of 4.4% until 2026.
FDX and UPS are expected to benefit from the industry’s promising prospects.
FDX has lost 31.3% over the past month, while UPS has lost 16%. FDX has lost 32.6% over the past year and 42% year-to-date, while UPS has lost 10.5% and 22% over the same periods. But which of these stocks is the better pick now? Let’s find out.
On September 13, 2022, FDX expanded its partnership with Berkshire Grey Inc. (BGRY), a best-in-class company with Artificial Intelligence (AI)-enabled robotic solutions that automate supply chain processes. This collaboration primarily aims to enhance the efficiency and effectiveness of global supply chains through advanced AI automation technology.
On August 8, 2022, UPS announced that it would acquire Bomi Group, a multinational healthcare logistics provider. Under the agreement, several temperature-controlled facilities across 14 countries are expected to be built, and around 3,000 highly-qualified employees from Bomi Group would join the UPS Healthcare network in Europe and Latin America.
This partnership is expected to fortify UPS’ healthcare logistic services in the near term.
Recent Financial Results
FDX’s total revenue came in at $23.24 billion for the fiscal 2023 first quarter ended August 31, 2022, up 5.6% year-over-year. However, its non-GAAP operating income came in at $1.23 billion, down 17.7% year-over-year. Also, its non-GAAP net income came in at $905 million, down 23.8% year-over-year, while its non-GAAP EPS decreased 21.3% year-over-year to $3.44.
UPS’ revenue came in at $24.77 billion for the second quarter ended June 30, 2022, up 5.7% year-over-year. Its operating profit came in at $3.54 billion, up 8.5% year-over-year, while its net income increased 6.5% year-over-year to $2.85 billion. Moreover, its adjusted EPS came in at $3.29, up 7.5% year-over-year.
Past and Expected Financial Performance
FDX’s revenue and EPS have increased at 10.8% and 99.7% CAGRs over the past three years. FDX’s revenue is expected to increase marginally year-over-year in the fiscal years 2023 and 2024. Its EPS is estimated to increase 25.7% year-over-year to $18.23 in 2024. However, its EPS is expected to decline 29.6% year-over-year to $14.50 in 2023.
On the other hand, UPS’ revenue and EPS have increased by 11.4% and 31.5% CAGRs over the past three years, respectively. UPS’ revenue is expected to increase 4.7% and marginally year-over-year in 2022 and 2023, respectively. In addition, its EPS is expected to increase 6% and marginally year-over-year in 2022 and 2023, respectively.
FDX’s EBITDA and net income margins of 10.22% and 3.79% are lower than UPS’ 16.62% and 10.92%. Moreover, FDX’s ROE and ROTC were 14.51% and 5.73%, compared with UPS’ 80.59% and 21.98%, respectively.
Thus, UPS is more profitable.
In terms of forward EV/Sales, FDX’s 0.72x is lower than UPS’ 1.52x. Its forward EV/EBITDA of 7.39x is 18.8% lower than UPS’ 9.10x. Furthermore, FDX’s forward P/E of 10.91x is lower than UPS’ 13.06x.
Thus, FDX has more attractive valuations.
UPS has an overall B rating, equating to Buy in our proprietary POWR Ratings system. On the other hand, FDX has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
UPS has an A grade for Quality. Its trailing-12-month ROCE of 80.70% is 470.6% higher than the industry average of 14.15%.
On the other hand, FDX has a B grade for Quality. Its trailing-12-month ROCE of 14.49% is 2.4% higher than the industry average.
In addition, UPS has a C grade for Sentiment, consistent with its expected near-term modest increase in EPS. On the other hand, FDX has a D grade for Sentiment in sync with its expected near-term decline in EPS.
In the 17-stock Air Freight & Shipping Services industry, UPS is ranked #6, while FDX is ranked #11.
Both FDX and UPS should benefit from favorable investments and industry tailwinds. However, I think UPS’ higher profitability and solid bottom-line performance in the last reported quarter make it the better buy here.
Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Air Freight & Shipping Services industry here.
FDX shares fell $1.99 (-1.33%) in premarket trading Thursday. Year-to-date, FDX has declined -41.90%, versus a -22.16% rise in the benchmark S&P 500 index during the same period.
About the Author: Riddhima Chakraborty
Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master’s degree in economics, she helps investors make informed investment decisions through her insightful commentaries.