Image source: UPS.com.
FedEx Corporation (FDX 0.05%) reported stellar quarterly results last month, rocketing share prices up 12% in a single day. With stock prices pushing higher, investors are wondering whether FedEx Corporation or United Parcel Service (UPS -0.07%) is a better buy.
Here's what you need to know.
1. Business as usual?
On the surface, FedEx's and United Parcel Service's business models look quite similar -- and that's because they are. While FedEx has historically carved out a comparative advantage in Express shipments, and United Parcel Service has focused on international scale, each is ultimately focused on delivering packages from Point A to Point B as efficiently as possible.
As FedEx CEO Fred Smith recently noted during an earnings call, both FedEx and United Parcel Service are focused on "network density and revenue per delivery." In many ways, both businesses are taking more similar paths to achieve that than ever before.
FedEx Corporation is attempting to scale up and go more global with its proposed $4.9 billion acquisition of Netherlands-based TNT Express. The move would, for the first time, put FedEx's and UPS's revenues at equal levels, and it would allow FedEx to seriously ramp up its Europen delivery offerings.
United Parcel Service has continued to increase its focus on its high-margin express business. Last year, the company announced its largest one-time increase ever in Worldwide Express offerings by adding 41,000 new postal codes and expanding its total express reach to 65 countries. Earlier this month, UPS bumped that number again to 88 countries where it can now guarantee midday delivery.
2. Company values
Image source: FedEx Corporation.
Since FedEx and United Parcel Service are so similar, one of the most important metrics for investors to consider is company values. FedEx Corporation has historically been the underdog, biting at the heels of heavyweight United Parcel Service. FedEx Corporation's market cap currently clocks in at $44 billion, less than half of UPS's $94 billion.
While both companies have steady sales models, they differ dramatically in how they choose to spend that revenue. FedEx Corporation management has infused an ethos of growth and risk into the company. While its proposed TNT express acquisition may be the best example, this same strategy shines through in a variety of other ways. For example, FedEx recently announced an increase in capital expenditures for the next three years, which will amount to nearly 10% of its annual revenue.
Image source: FedEx Corporation. Vertical axis units are $M (excludes TNT acquisition).
United Parcel Service has found its own footing as a lower-risk stock. UPS investors simply aren't after the same growth that attracts FedEx shareholders. Instead, they're interested in steady dividends, and United Parcel Service has made it clear that this is its preferred tool in delivering value to shareholders.
UPS has offered investors a 3% dividend yield over the past five years, systematically increasing absolute distributions to keep payouts relative to its own share price increases:
UPS Dividend data by YCharts.
Over the same period, FedEx has kept its yield hovering around 0.6%, choosing to instead spend cash on growth initiatives like the ones above.
3. Stock price and valuation
Over the past five years, FedEx Corporation stock has solidly outperformed United Parcel Service by around 30 percentage points.
But in the last year, United Parcel Service investors have been the ones celebrating. Even with FedEx's recent boost, share prices are still in the red as UPS stock has steadily advanced 10%.
Stock prices represent all current and discounted future value of a company, and it's possible expectations for FedEx were simply too high. Even at current rates, FedEx stock is valued at roughly twice that of United Parcel Service. The flip-flop in valuation is primarily a result of a major earnings drop FedEx swallowed in 2015, when quarterly diluted earnings-per-share (trailing-12-month) fell from about $10 to $3.50 today.
FDX P/E Ratio (TTM) data by YCharts.
Stock prices and valuation don't tell us anything about a company's specific business and plans for the future, but they do let us know what the market thinks of them. Buying a stock that's overvalued is one of the easiest mistakes to make, with major consequences for your portfolio's profit. FedEx may not be overvalued, but its higher valuation means investors should be deliberate in their decision to "pay double" for FedEx instead of United Parcel Service stock.
Investor takeaway
As an economist, I get to use my favorite answer when asked whether Fed Ex Corporation or United Parcel Service is a better buy: It depends. For risk-averse investors looking for steady income, UPS may be the best stock to deliver for your portfolio. But for those looking to take on more risk in hopes of higher returns, FedEx Corporation has a lot of upside to offer.
