UPS Hangs Tough

Package delivery service FedEx (NYSE: FDX  ) last week reduced its earnings guidance, both for the current quarter and the full year. As fellow Fool David Lee Smith observed, this lowered outlook may stem from a softening economy. Will it also signal deteriorating profitability for rival United Parcel Service (NYSE: UPS  ) ?

Not necessarily. UPS may still face its own day of earnings reckoning, but the company reiterated its previous guidance as recently as Oct. 23 -- even while it forecast slower U.S. retail sales and a lackluster outlook for the U.S. economy. To this Fool, UPS seems less sensitive to a general decline in economic conditions than FedEx.

For one thing, UPS has a relative advantage over FedEx in fuel costs. It shouldn't be surprising that a company with a large fleet of trucks and aircraft is sensitive to fuel costs -- FedEx specifically blamed pricier fuel, in part, for its revised earnings guidance. But fuel expense measured roughly 5% of UPS' revenue in recent years, compared with 10% for FedEx.

David Lee Smith retains a positive view on FedEx shares, observing that the company did not dramatically revise its earnings forecast. It's well-positioned to profit from expanding global economies, and its stock trades at an attractive P/E multiple. Investors may want to consider buying shares of UPS for many of the same reasons.

At a recent price of $72, UPS shares trade at around 18 times trailing earnings -- a richer multiple than FedEx's 14. But UPS has consistently achieved higher operating and net margins than its rival, not to mention returns on equity. Shares of UPS also provide a dividend yield of 2.3%. FedEx's stock, by contrast, provides a modest 0.4% yield.

Both FedEx and UPS have strong growth prospects, and an investment in either company's stock is likely to reward long-term investors. In the near term, however, UPS seems better-equipped to weather a sluggish economy, and less volatile in its share price than FedEx.

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Related Tickers

10/24/2016 4:02 PM
UPS $108.45 Up +1.29 +1.20%
United Parcel Serv… CAPS Rating: ****
FDX $172.08 Up +1.88 +1.10%
FedEx CAPS Rating: ****