2020 is coming to a close, and investors in virtually every sector are getting rewarded as equity valuations continue their seemingly undeterred push higher. Strong Black Friday and Cyber Monday sales kicked off what is now a thriving holiday season.
Package delivery giants like United Parcel Service (UPS 2.18%) and FedEx (FDX 2.16%) are well-positioned to benefit from online orders and higher package volume. But they also have the characteristics to thrive during a recession. Here's what makes freight and logistics companies like UPS and FedEx unique and why they could deserve a place in your portfolio right now.
Beating the market
The transportation sector, as represented by the SPDR S&P Transportation ETF, has essentially matched the performance of the S&P 500 this year while beating the broader industrial sector.
The ETF contains nearly 30% airline stocks, which as a group are underperforming the market. But the winners it does contain are big winners, like Uber, UPS, and FedEx. FedEx and Uber have nearly doubled this year, and UPS has given investors a total return of 47%.
From doubt to praise
Shares of UPS and FedEx were getting hammered in March and April along with the rest of the market. It was well assumed that both companies would see a spike in e-commerce revenue and residential deliveries from pandemic-induced trends, but the big question mark was profitability.
The change in sentiment began on June 30, when FedEx reported its fourth-quarter fiscal year 2020 results. The better-than-expected FedEx earnings results were soon followed by a blowout second quarter from UPS that sent its shares to a new all-time high. Both companies proved that higher residential deliveries and only slightly lower profit margins were enough to offset declines from higher-margin business-to-business (B2B) sales. UPS in particular actually grew international margins, traditionally one of its most profitable segments. Combined with residential growth, this was more than enough to offset B2B declines.
FedEx and UPS have continued to post fantastic results. FedEx's first-quarter FY21 notched record revenue and its highest net income and operating margin in years. Shares of UPS dipped about 8% after its last report. But there's reason to believe UPS earnings were better than what the market gave it credit for. Since then, shares have rebounded. Both FedEx and UPS are now trading at or within striking distance of their all-time highs at the time of this writing.
20th-century recessions happened for a variety of reasons. Examples include declines in post-war spending, changes in monetary policy, and oil-related conflicts that crashed stock markets. The 21st century has endured the dot-com bubble, the housing crisis/Great Recession, and the COVID-19 recession. The reasons for each recession were different, but they all had one thing in common: They were unexpected.
No one knows why or when the next recession will occur (keep in mind we are still living in a recession). What we do know is that UPS and FedEx are thriving during our current recession. Shipping giants spend a lot of money on fuel. So it's no surprise that UPS saved $367 million in the first half of 2020 thanks to lower crude oil prices. During the company's Q1 FY21 earnings call, FedEx COO Rajesh Subramaniam said that FedEx is entering "what we expect to be a peak holiday shipping season like no other in our company's history." UPS is expecting higher spending to offset end-of-year profitability despite volume and revenue increases. But the company should still achieve one of its best years in history.
UPS and FedEx are now diversified enough to thrive during this recession. UPS made timely investments into e-commerce, healthcare, and small and medium-sized businesses which have opened the door to previously untapped revenue streams. FedEx's advanced logistics and forecasting allow it to lean into strong markets and ease up during weak ones. The transportation stock is preparing for a peak holiday season by adding 70,000 new U.S. positions, expanding its ground warehouses and sorting facilities, and investing in new equipment and automation.
The backbone of the modern economy
Shipping companies benefit from higher package volume. So higher spending naturally boosts their performance. It's hard to be completely immune from economic slowdowns while at the same time benefiting from economic booms. But there's a lot to like about FedEx and UPS.
The world is moving faster than ever before, and that's largely a result of shipping giants that make e-commerce run quickly and securely. In addition to freight, logistics, and international, UPS is becoming even more diversified by tapping into different parts of the U.S. economy. The more business it can generate from different markets, the better its chances are at thriving during a recession. FedEx and UPS are expected to be big winners from Black Friday and Cyber Monday. Both companies are well-positioned for long-term growth, but UPS's diversified business and incredibly stable dividend make it the overall better buy.