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.

For related Foolishness:


Read/Post Comments (0) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 540646, ~/Articles/ArticleHandler.aspx, 7/24/2014 7:43:27 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement