The pandemic-led slowdown in several businesses was expected to severely drag down FedEx and United Parcel due to lower B2B (business-to-business) shipments. But social distancing restrictions and the temporary closure of retail stores caused an unprecedented rise in e-commerce sales, which in turn boosted the demand for FedEx and UPS. Prior to the pandemic, Fedex projected that the US domestic market would touch 100 million packages per day by 2026. But now the company predicts that the US domestic parcel market will hit this mark as soon as 2023.
FedEx and UPS are now gearing up for the holiday season, which FedEx’s President and COO Raj Subramaniam expects to be “a peak holiday shipping season like no other in our company’s history.”
With this backdrop, we will use the TipRanks’ Stock Comparison tool to place FedEx and UPS alongside each other and see which stock offers a better investment opportunity.
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FedEx has such a massive network that about 92% of the US population is now living within five miles of its pickup or drop off location. Such a vast network and an extensive presence in over 220 countries helped FedEx meet strong volume growth as COVID-19 triggered a spike in e-commerce. Revenue in the first quarter of fiscal 2021 (ended Aug. 31) grew 13.5% Y/Y to $19.3 billion and adjusted EPS surged about 60% to $4.87.
Robust e-commerce demand resulting from shelter-at-home orders and other restrictions amid the pandemic drove strong volume growth in residential delivery services at FedEx Ground and US domestic package volume growth at FedEx Express.
The top-line also gained from international export package volume growth at FedEx Express, yield improvement at FedEx Ground and FedEx Freight and the impact of one additional operating day. Moreover, FedEx is benefiting from tight air cargo capacity as COVID-19 continues to hurt commercial airlines.
Though B2C (business-to-consumer) volumes are large, it has lower margins and so to improve profitability FedEx Ground, Express and Freight will increase shipping rates by an average of about 4.9% beginning Jan. 4, 2021.
While B2C volumes are expected to continue to be strong due to e-commerce, FedEx is also experiencing a steady improvement in B2B volumes. For the holiday season, the company is adding over 70,000 positions and is enhancing its FedEx Ground network by adding four new automated stations, eight new or expanded large package facilities and expanding 50 existing facilities with additional material handling equipment and automation.
Following the upbeat results, Wells Fargo analyst Allison Poliniak reiterated a Buy rating for FedEx and increased the price target to $286 from $221. The analyst said, “Results were a beat across the board, but we believe that the focus point should be the margin trajectory that was seen today and what we expect going forward.”
In a note to investors, Poliniak added, “FedEx achieved an aggregate incremental margin of 26% this quarter, and we believe this could be a base level assumption moving forward." (See FDX stock analysis on TipRanks)
So far, FedEx stock has risen 60.5% and the average analyst price target of $275.05 implies an upside potential of 13.3% in the coming months. The Street’s Moderate Buy consensus for FedEx is based on 16 Buys, 8 Holds and no Sell ratings.
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United Parcel like FedEx has been experiencing elevated B2C shipments since the pandemic. The global logistics company’s second-quarter revenue grew 13.4% Y/Y to $20.5 billion. COVID-led e-commerce growth drove a 65.2% rise in domestic B2C shipments. In the US, the company saw a 22.8% rise in its average daily volume, reaching 21.1 million packages a day.
The international business gained from robust outbound demand from Asia and a rise in cross-border e-commerce in Europe. The company added 635 flights to address the volumes in Asia. Despite a 21.9% decline in B2B shipments and margin pressure, United Parcel’s adjusted EPS grew 8.7% Y/Y to $2.13.
Recently, UPS announced it will hire over 100,000 seasonal employees to support the anticipated increase in package volume for the peak holiday season. The company expects robust demand for residential shipments to continue. However, it is unsure about how the B2B business will unfold even as the decline in B2B shipments moderated in June.
Meanwhile, the company continues to trim its costs to improve its margins. It is offering buyouts to some employees to bring down its payroll costs. According to the Wall Street Journal, the company is expected to offer buyouts to some employees in non-operational roles and the workers would leave in two phases–by the end of this year and mid-2021. (See UPS stock analysis on TipRanks)
On Sept. 3, Berenberg analyst William Howard downgraded United Parcel to Sell from Hold while upgrading FedEx to Buy from Hold as part of his pair trade strategy for the leading package delivery majors. The analyst notes, “All three global integrators - Deutsche Post, FedEx and UPS - have had a pretty good pandemic so far. The market has got overexuberant about e-commerce growth,” However, he believes that FedEx has a wider profit margin relative to UPS.
The Street is on the sidelines when it comes to UPS. A Hold consensus is based on 6 Buys, 5 Holds and 4 Sells. UPS stock has risen 36.4% so far this year but the average analyst price target of $141.69 indicates a possible downside of 11.3%.
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Bottom line
Both UPS and FedEx are expected to continue to benefit from strong e-commerce amid the pandemic. UPS has a higher dividend yield of 2.52% compared to FedEx’s dividend yield of 1.1%. However, the upside potential in FedEx stock currently makes it more attractive compared to UPS.
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment
