Is It Time to Buy UPS and FedEx?

The share prices of package-delivery giants UPS (NYSE: UPS  ) and FedEx (NYSE: FDX  )  have been down in the high-single digits in 2014. Essentially, the market is punishing them for a difficult Christmas period when high-profile delivery delays disappointed consumers and online retailers alike. Has this created a buying opportunity in UPS and FedEx?

UPS and FedEx have been unfairly criticized
The widely publicized problems with Christmas deliveries led to UPS and FedEx receiving substantive amounts of criticism, but investors need to appreciate that the issues were partly caused by an unusual confluence of incidents. From an investment perspective, the main concern is that the problems were somehow systemic, which would necessitate greater investment in order to rectify them. On the other hand, investors need to bear in mind the following points about recent events:

  • The Christmas selling season was unusually short, as it contained six fewer days than last year.
  • Extreme bad weather in the U.S. caused significant logistics problems. 
  • Online retailers increased their last-minute promotions, and consumers delayed decision making until late in the season.
  • E-commerce shipment growth came in far higher than expected by UPS.

In a sense, many of these events are related. For example, extreme cold weather may have encouraged more people to buy online. Also, it may have led to a bottleneck in online purchases by causing consumers to delay their ordering until the last minute as they hoped for better weather to go shopping in the malls. In addition, severe snow storms shut down UPS's operations for over three days in places like Texas and Oklahoma. All of this came together to make conditions very difficult for UPS and FedEx.

Indeed, UPS saw a dramatic 12.7% decline in adjusted operating profit within its U.S. domestic package segment.


Source: UPS Presentations

While these issues hurt short-term performance, they are unlikely to repeat in the future in the same manner. Furthermore, the trend toward e-commerce is actually one of the three key long-term demand trends which affects UPS and FedEx.

Long-term trends for UPS and FedEx
The first trend is the increasing willingness of customers to trade-off timely delivery for cost. UPS's management explicitly recognized this trend in the recent conference call by saying that "customers put greater emphasis on cost rather than time in transit". A quick look at how FedEx's earnings have shifted toward its ground segment (from express) reveals the importance of this trend.


Source: FedEx Presentations

The second trend is the shift toward e-commerce, which obviously creates long-term growth opportunities for package delivery companies.

The third trend is the somewhat more problematic issue of increasing protectionism in the global economy. Investing Fools already know about this trend and how it affects the international operations of FedEx and UPS. Simply put, increased protectionism leads to slower growth in global trade and therefore cargo freight activity as well.

UPS and FedEx need to invest anyway
Putting these three trends together quickly leads to the conclusion that both companies will have to invest in the future. They will need to structurally shift investment toward supporting their slower delivery services and handling the burgeoning e-commerce demand. This is actually good news. Investors should support companies that are investing for growth.

Moreover, the decline in global trade looks to have abated and trade could turn into a positive driver going forward.


Source: IATA

Furthermore, UPS's management was clearly keen to invest in technology in order to ensure the "timely and accurate visibility of shipments". One such solution is machine vision technology from a company such as Cognex (NASDAQ: CGNX  ) . The company is actively trying to expand its logistics sales (it believes this market is worth $250 million), and given the emphasis that companies like UPS and FedEx are placing on technology investment, it's not hard to imagine that Cognex will be successful.

The bottom line
In conclusion, the sell-off looks a little harsh in the context of an unusually difficult Christmas period. Furthermore, long-term growth in e-commerce is actually a big plus for UPS and FedEx, and Fools should look at this as a long-term positive. Furthermore, the investments that these companies are making to rectify any future problems with network capacity are also measures that should help their overall efficiency. If you believe that the global economy is going to improve in-line with economists' forecasts then the current sell-off could prove a good buying opportunity in FedEx and UPS.

What else might investors hold forever?
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal "The Motley Fool's 3 Stocks to Own Forever." These picks are free today! Just click here now to uncover the three companies we love. 


Read/Post Comments (0) | Recommend This Article (3)

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.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2860973, ~/Articles/ArticleHandler.aspx, 10/24/2014 5:26:31 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...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement