FedEx Vs UPS: Which is the Better Buy?

Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.

Shipping stocks are not responding well to news of ECB (European Central Bank) bond buying. Deliberations over the of ECB government debt purchases sent the Dow Jones Transportation Average (TRAN), a gauge of twenty different shipping companies, down over 1%. FedEx

slid 2% to just under $86, this is the largest drop since mid July. FedEx's rival, United Parcel Service (UPS) also dropped, losing a little over 2% to less than $72.

In fact, most U.S. stocks fell as investors anxiously awaited the European Central Bank's plan to purchase bonds. The sensitivity of these transportation stocks to the health of the global economy begs the question: are they good ways to play recoveries in Europe or China?

Global Shipping Enterprises

FedEx is the operator of the world's largest cargo airline, but this global company is not safe from a global economy slump. FedEx stated that their quarterly earnings for the quarter ending August 31st were less than $1.50 per share. This is less than the high-end expectations of $1.60 per share. An average of over 20 analyst estimates compiled by Bloomberg expected adjusted profits in the quarter to be a little over $1.50 a share. Raymond James & Associates analyst Arthur Hatfield said that ?the global economy is weak and it's impacting their business in the short run,? but he doesn't believe that there is anything wrong with FedEx in general.

Without earnings beats there will be a heightened emphasis in cost cutting efforts, which are expected to include a voluntary buyout program and the grounding of some older FedEx planes. Buyouts will focus on employees at FedEx Express and FedEx Services, but FedEx have not yet decided how many workers would accept offers at this time. In June 2012, FedEx stated that it would retire over 20 jet freighters, and over 40 older engines to help match shipping volumes. It also stated that it plans to retire 20 Boeing

(NYSE: BA)
aircraft this year and replace them with the more fuel efficient Boeing 767-300 and 757-200 aircraft. This is great news for Boeing, which sells its 767-300 Freighters for an average of $185.4 million. For FedEx, this restructuring is expected to lower costs by between $200 and $900 million.

Further Inroads to China

FedEx and the United Parcel Service are expanding into China, having won licenses to begin domestic services in many major Chinese cities. FedEx will offer service in eight cities, while UPS will offer service to five. These licenses will allow both companies to serve Tianjin, Shenzhen, Shanghai, and Guangzhou. FedEx will also operate in Hangzhou, Chengdu, Zhengzhou, and Dalian. UPS will also operate in Xian.  Both FedEx and UPS will be competing against China postal Express & Logistics which is the market leader with roughly 30% market share. According to William Blair & Co analyst Nate Brochmann, the entry of UPS and FedEx will ?set the platform for eventual consolidation and market-share gain opportunity.? Their services will not include letter delivery.

According to Shea Leordenau, a FedEx spokeswoman, the company has been working on gaining these licenses for about three years. FedEx actually entered China as far back as 1989 with its purchase of the Flying Tigers freight airline, which gained routes to over 20 Asian countries. In 2007, FedEx took over a joint venture with Tianjin Datian W Group giving them access to China's domestic market. This takeover cost $400 million. Both FedEx and UPS have long term strategies to expand into Asia, and the newly acquired licenses to work domestically within some Chinese cities are part of this strategy. However the Chinese parcel market is not as mature as those in Europe and the U.S., and it will take some time in order to build the necessary networks.

Delivering Value

Among mid cap and large cap air delivery & freight service companies FedEx is a standout bargain:

FedEx is the most cheaply valued stock on this list based on the price-to-earnings ratio. FedEx stock is also the third most cheaply valued based on its low 0.66 price-to-sales ratio while it is second cheapest based on its low 1.9 price-to-book ratio. These valuations are particularly attractive in light of the analyst estimates which project its earnings growth near the middle of firms on this list.

In contrast, United Parcel Service (NYSE: UPS)

stock is not attractive. Analysts expect its earnings growth to be at the bottom of mid cap and large cap air delivery & freight service companies. United Parcel Service shares trade at a higher price-to-earnings multiple, a higher price-to-sales multiple, and a higher price-to-book multiple.

Since FedEx offers investors more attractive valuations and more attractive growth prospects, it is a better way to play a turn-around in global shipping. Investors should consider buying this stock while the price declines as bad news about the global economy emerges in the media. As a basis of comparison, the stock?s price-to-earnings ratio in 2007 was 13.9, which was the lowest annual ratio for the stock in the past ten years.

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Source: http://beta.fool.com/billedson11/2012/09/23/fedex-vs-ups-which-better-buy/12480/

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