Most of the time, you don't really notice what company drops off a package at your door. It could have been USPS, United Parcel Service (NYSE:UPS), FedEx (NYSE:FDX), or even Amazon (NASDAQ:AMZN) Prime delivery. 

At first glance, UPS and FedEx are practically the same. They both deliver packages domestically and internationally as well as offer supply chain, freight, and logistics services. Yet the companies, let alone their stock performances, couldn't be more different.

Breaking down UPS and FedEx

Image source: Getty Images.

UPS

UPS is the sixth-largest company in the industrial services sector and over 2.5 times the size of FedEx. UPS operates in three primary business segments: domestic, international, and supply chain and freight.

Comparing UPS' second-quarter 2019 results with 2Q 2018 shows that it posted revenue gains in domestic but actually declined in revenue in its international and supply chain and freight segments, netting just $1.96 in adjusted earnings per share compared to $1.94 in Q2 2018. Although revenue was disappointing, note that UPS increased its operating margins in all three segments quarter over quarter. UPS was proud to announce in its Q2 2019 investor presentation slides that profit grew in all three business segments, making it the most profitable quarter in the history of the company.

Metric

2Q 2019

2Q 2018

U.S. domestic segment revenue

$11.15 billion

$10.354 billion

U.S. domestic segment operating profit

$1.208 billion

$0.939 billion

Domestic operating margin

10.8%

9.1%

International segment revenue

$3.505 billion

$3.602 billion

International segment operating profit

$0.663 billion

$0.618 billion

International operating margin

18.9%

17.2%

Supply chain and freight segment revenue

$3.393 billion

3.5 billion

Supply chain and freight operating profit

$0.272 billion

$0.216 billion

Supply chain and freight operating margin

8%

6.2%

Data source: UPS Investor Relations.

On the earnings call, UPS' tone was generally positive. The company discussed the opening of three major automated hubs in the United States, the addition of 44 new aircraft between 2017 and 2022 (11 this year alone), a 30% increase in Next Day Air volume, improving transit times in cities, increasing its focus on small to medium-size businesses, and more.

UPS' operating margin for its international business is now a whopping 18.9%. That's astounding considering FedEx has been complaining for over a year that trade tensions and a slowing global economy are plaguing any industrial company with international exposure. Although revenue growth was mediocre, UPS' ability to increase operating margins while investing considerably in its logistics and Next Day Air businesses is impressive. Pair that performance with returning $2.2 billion to shareholders in the form of $500 million in share repurchases and $1.7 billion in dividends, and you have a solid company.

FedEx

Unlike UPS, FedEx relies on its express segment for most of its revenue. Fortunately, FedEx Express has been consistently growing for the last four fiscal years. FedEx Express' packages delivered has increased by 50% since 2016, but average revenue per package declined from $19.70 to $18.40 during that period. The increased volume and lower returns can be attributed to FedEx's acquisition of TNT Express. Meanwhile, FedEx ground and freight have both increased their packages shipped by 9% and 7%, respectively, since 2016. FedEx ground increased its revenue per package from $7.80 to $9.00 in just four years, while freight also increased its average revenue per pound from 20 cents to 23 cents.

Segment/Metric

FY2018

FY2019

Q1 FY2020

Express

$36.17 billion

$37.33 billion

$8.95 billion

Ground

$18.40 billion

$20.52 billion

$5.18 billion

Freight

$6.81 billion

$7.58 billion

$1.91 billion

Services

$28 million

$22 million

$4 million

Other

$4.04 billion

$4.24 billion

$1.02 billion

Total revenue

$65.45 billion

$69.69 billion

$17.05 billion

Operating expenses

$61.18 billion

$65.23 billion

$16.07 billion

Net income

$4.57 billion

$0.54 billion

$0.75 billion

Operating margin

6.5%

6.5%

5.7%

Data Source: FedEx Corporation Annual Consolidated Statements of Income.

FedEx ground and freight are improving their volume, growth per package, and posted record revenues in fiscal 2019. Meanwhile, express is now the largest part of the business, but TNT's exposure to Europe makes FedEx particularly susceptible to the global economy.

Despite posting record revenue of $69.69 billion in fiscal 2019, FedEx achieved an abysmal $540 million in net income due to a mark-to-market retirement plans loss of $3.81 billion.

FedEx has blamed everything and everyone for its lackluster performance, including global economic headwinds, trade tensions, and the loss of its negligible 3% last-mile carrier share of Amazon.com shipments. FedEx made reference in its Q1 2020 presentation slides to the purchasing managers' index, which is a good indicator of the direction of economic trends in the manufacturing and service sectors.

PMI is a number from 0-100, with any number less than 50 signaling an economic contraction and any number above 50 signaling expansion. The U.S. manufacturing PMI fell below 50 in mid-2019 and the eurozone manufacturing PMI, as reported by IHS Markit, has been below 50 since the beginning of 2019. Both indexes were around 60 in late 2017/early 2018. FedEx stressed the negative sentiment in two of its largest markets as a primary reason for recent challenges.

Conclusion

UPS and FedEx are commonly known as two of the largest shipping and logistics titans in the world. Yet as of market close on Sept. 30th, the former is up a market-beating 23% year to date and the latter is down 11%. UPS' dividend also yields over 3% compared to FedEx's less than 2%.

UPS is less susceptible to global economic factors and trade tensions than FedEx, but both companies have incredible pricing power and dominant niches in their respective business segments. The lesson here lies in two distinctive management strategies and tones.

UPS' management is careful not to overspend, choosing instead to bolster margins in times of difficulty and focus on postivies despite its share of negatives. On the other hand, FedEx finds itself blaming the world for its problems. Granted, FedEx has experienced a misfortunate medley of concurrent problems. Although mark-to-market losses on pension plans wiped out over 80% of its would-be earnings for 2019. These mark-to-market adjustments are non-cash charges, meaning no impact on cash flow for the fiscal year.

FedEx is guiding for $10 to $12 of diluted earnings per share in fiscal 2020, giving the company a forward P/E of 15.0 to 12.5. UPS is guiding for adjusted diluted EPS of $7.45 to $7.70 in its current fiscal year, giving the company a forward P/E of 15.3-15.8.

UPS trades at a premium to FedEx, but should it? UPS has proven its ability to provide consistent shareholder value through three core business segments, but the company has a much larger risk of losing business from Amazon which accounts for 5-8% of total UPS volume. UPS will suffer as Amazon continues to expand its delivery service whereas FedEx is relatively insulated from the narrative.

FedEx and UPS are undeniably global leaders in the shipping and logistics market. Both companies have decades of solid performance and growth. UPS is focused on many different facets of its domestic business, with an international segment that accounts for nearly 20% of revenue at a ripe 18.9% margin. Meanwhile, FedEx has already suffered the impact from a difficult FY 2019 for pension performance, the loss of Amazon's business, and the harsh reality that trade tensions will be ongoing for the near-future. Although short-term headwinds persist, FedEx's focus on express and e-commerce bodes well for the long-term. Both trends look incredibly attractive for future growth.

Believing in FedEx for the long term, despite the company's recent woes, is important for shareholders ready to weather short-term volatility. A basket of both stocks would provide a good fit for an investor looking for heavy domestic and international exposure across express, e-commerce, ground, and freight.