Should You Buy FedEx Stock Over UPS?

We think that FedEx (NYSE: FDX) currently is a better pick compared to United Parcel Service (NYSE: UPS). FDX stock trades at about 0.9x trailing revenues, compared to around 1.7x for UPS. Does this gap in FedEx’s valuation make sense? We don’t think so. While both the companies have benefited from rapid growth in e-commerce, FedEx is partly being weighed down given the impact on its earnings from challenges in integration with TNT, which it acquired back in 2016. That said, the company expects the full integration to be completed in 2022 with total integrations costs of $1.7 billion, out of which it has already spent $1.3 billion, implying little impact on future earnings due to these costs. Furthermore, continued growth in residential deliveries, as well as a rebound in other business segments post pandemic, will bolster near term revenue growth for both the companies. A steady top-line growth with margin expansion for FedEx will result in the valuation gap narrowing in favor of FedEx, in our view. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard United Parcel Service vs. FedEx: UPS stock looks overvalued compared to FDX stock has more details on this. Parts of the analysis are summarized below.

1. Revenue Growth

Between fiscal 2017 and fiscal 2020 (fiscal year ends in May), FedEx’s Revenues grew by about 15%, rising from around $60.3 billion to $69.2 billion, partly driven by its TNT acquisition. On the other hand, UPS’ Revenues grew by about 28% between 2017 and 2020, rising from around $65.9 billion to $84.6 billion, implying UPS’ revenues have grown at a faster pace over the recent years. However, much of the growth for both the companies came over the recent quarters during the pandemic, as people stayed in-doors and ordered products online. This growth is captured in UPS’ numbers above but not for FedEx, given its fiscal 2020 ended in May. Looking at the last twelve month period, FedEx’s revenue surged to $74.7 billion, implying 8% growth (vs. 14% for UPS).

2. Operating Income

FedEx’s operating income declined from $5.0 billion in 2017 to $2.3 billion in 2020, as its margins contracted from 8% to 3% over the same period. However, the margins rebounded to 5% over the last twelve month period due to better pricing, amid an increased demand for shipping during the pandemic. Looking at UPS, the operating income stayed at around $7.7 billion levels over the recent years, as a growth in revenues was offset by a 240 bps decline in margins from 11.5% to 9.1% over the same period.

The Net of It All

Although UPS’ revenue growth as well as operating margins compares favorably with that of FedEx, the latter is expected to see strong growth going forward, given the completion of the TNT integration, as well as other initiatives taken by the company to expand its margins. For perspective, the company’s operating margins more than doubled to 7.1% in fiscal Q2 2021, compared to 3.2% in the prior year quarter. Looking forward, we estimate FedEx revenue growth as well as margin expansion to be higher than UPS’ over the coming years, and as such, we believe that the valuation gap between FedEx and UPS will narrow going forward and FDX stock will offer better returns for long-term investors.

While FDX stock looks like it can gain more, 2020 has also created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for UPS vs. Sprouts Farmers Market.

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