When you have to send something somewhere, your options are somewhat limited. You could ring up your neighbor and see if he'd be willing to tote your three-pound box to Uncle Floyd, who lives 800 miles away in Omaha. But your neighbor probably won't be interested. You could try throwing it, but it likely won't even get close, and if you're sending wine glasses, they might break. Hmm... what to do? If you're like most people, you'll find yourself deciding between FedEx (NYSE:FDX), United Parcel Service (NYSE:UPS), and the good old U.S. Postal Service. (Yes, there are other options, but let's face it -- most of us are unaware of them or rarely use them.)
If you want to add a new company to your portfolio of investments, you might consider FedEx and UPS. Permit me to offer an introductory look at the two companies.
FedEx
FedEx is the premier air-express shipper, using more than 245,000 employees and contractors and raking in some $25 billion annually. It recently acquired Kinko's and will be making its delivery services available from Kinko's locations. The company has often been named as an admirable employer. Courtesy of the company itself, here are some eye-opening facts about FedEx:
- It handles about 5.4 million shipments daily.
- It serves people in 215 nations (which is nearly every nation that exists).
- More than 2.5 million customers click onto its website each day.
- It maintains 877 express delivery stations, 10 air express hubs, 27 ground delivery hubs, 500 ground pickup/delivery terminals, 328 freight service centers, and 1,202 Kinko's stores.
- It operates 643 aircraft, serving 378 airports around the world.
- Each FedEx vehicle you see on the road has about 71,000 brethren delivering goodies.
- It sports nearly 42,000 drop boxes, including about 5,000 at U.S. Postal Service locations.
- It's among Fortune's top 10 most-admired companies in the U.S. and the world, and among the "100 Best Companies to Work for in America" (1998-2004) and the "50 Best Companies for Minorities" (2000-01, 2003).
Why FedEx
There are a number of ways in which FedEx is attractive, beyond its strong brand name. For example:
It has a moat protecting it from competition. The moat is not unassailable, though, and UPS, for one, has become a threatening competitor. Still, few others will likely ever enter this business, as it requires a heck of a lot of infrastructure investment to create a network that can deliver almost anything anywhere.
It has vision and resourcefulness. The company recently bought the Kinko's chain of copy centers for $2.4 billion, Kinko's has reportedly already boosted FedEx's earnings, and it's expected to generate $2.1 billion in revenues in fiscal 2005. Within a few months, Kinko's will offer a full line of FedEx services at all its locations, generating additional income. Part of the reason Kinko's was bought was to generate more business from smaller customers. Meanwhile, the newish FedEx Ground delivery service has seen demand for it "soar," according to management.
It has growth potential. What discussion of a company's growth potential would be complete without mentioning the vast opportunity that is China? Well, FedEx already serves some 224 cities in China, and plans to add 100 more in the near future. Even Kinko's plans to expand in China, from two stores to hundreds. (Lest your heart beat too fast right now, remember that there are only two stores there at the moment.)
Why (not) FedEx
FedEx is not without some drawbacks as an investment, though. For starters, in many ways, it's an airline. And the airline business is a notoriously difficult one in which to turn a profit. Yes, Southwest Airlines (NYSE:LUV) has done so for many years, but many bigger-name airlines have pretty much just struggled for decades. It's true that FedEx doesn't have to engage in fare wars with other airlines to attract passengers. But it does still have to deal with airline downsides such as the volatility of fuel prices and the massive expense of buying and maintaining airplanes.
Other downsides to FedEx include relatively low profit margins (around 3%) and a meager dividend, for those who seek dividend income. (If that's what interests you, check out our Motley Fool Income Investor newsletter.)
United Parcel Service
There's a compelling business behind those big brown trucks. In its own words: "Founded in 1907 as a messenger company in the United States, UPS has grown into a $30 billion corporation by clearly focusing on the goal of enabling commerce around the globe. Today UPS, or United Parcel Service Inc., is a global company with one of the most recognized and admired brands in the world. We have become the world's largest package delivery company and a leading global provider of specialized transportation and logistics services."
Here are some facts about the company:
- Annual revenues top $33 billion.
- The firm employs more than 350,000 people, about 40,000 of whom are international.
- UPS delivers some 13.6 million packages and documents daily, 2 million by air.
- It serves more than 200 countries and territories.
- It serves about 8 million customers daily, picking up from about 2 million and delivering to about 6 million.
- It manages 1,748 operating facilities; 88,000 cars, vans, tractors, and motorcycles; 266 UPS aircraft; and 316 chartered aircraft.
- Its supply-chain solutions business generates a total of more than $2 billion yearly, from more than 750 locations in 120 or more nations.
Why UPS
Here are some reasons to consider UPS for your portfolio:
It has solid profit margins. Whereas FedEx sports a net profit margin in the neighborhood of 3%, UPS's margins approach 11% and they've been growing. That's a big difference, revealing that UPS is able to do its stuff less expensively, and thereby keep more of each dollar of revenue. To some degree, this difference is tied to UPS's lesser reliance on aircraft for many deliveries.
It's got a protective moat around its ground delivery business. FedEx is encroaching on this territory, as is the U.S. Postal Service, but ultimately, matching or beating it will be hard to do. Meanwhile, UPS is encroaching on FedEx's higher-margin express delivery services.
It has strong and growing cash flow. UPS generates a lot of cash and has been steadily generating more and more of it. In recent years, it has been coughing up more than twice the cash flow of FedEx.
Why (not) UPS
The strongest argument against investing in UPS is simply its price. The company's not exactly very undervalued right now. Its price-to-earnings (P/E) ratio of around 28 is somewhat higher than its historic range in the mid-20s. (Historic since the firm went public in 1999, that is.)
The bottom line
Interestingly, both UPS and FedEx have been making significant inroads into each other's prime territory. The question of who will win is intriguing, but the ultimate result may well be that both win. After all, the world seems capable of sustaining both Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP), and both McDonald's (NYSE:MCD) and Wendy's (NYSE WEN).
David Gardner recommended FedEx in the Feb. 2003 issue of Motley Fool Stock Advisor. What else has he picked for his subscribers? You can see for yourself with a risk-free trial for six months.
Selena Maranjian produces the Fool's syndicated newspaper feature - check it out . She owns no shares of companies mentioned in this article. For more about Selena, view her bio and her profile . You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is investors writing for investors.
