At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the best ...
UPS
If you're UBS, the answer turns out to be remarkably simple: Buy 'em both. On Thursday, the Swiss banker upgraded both stocks to "buy."
Says UBS: "UPS and FDX primarily trade on forward price-to-earnings multiples, and with the large declines in their stock prices yet fairly stable consensus earnings projections over the past couple months, these multiples have contracted from levels that we had viewed as fairly valued to levels that we now view as compelling for investors."
UBS puts FedEx at 16 times the very lowest estimates for its fiscal 2011 earnings, and says UPS trades for an 18-times multiple to similarly conservative estimates for it. As pessimism dissipates, however, UBS expects both stocks to soar -- predicting 27% gains for UPS as it rises to $74 a share over the next 12 months, and an even livelier leap for FedEx, which could gain 39% and hit $100.
Key to UBS' buy thesis is that both FedEx and UPS rely on massive transportation infrastructure to create their profits. This infrastructure entails massive fixed costs, which are currently depressing margins and profits, of course. But if global business improves, after fixed costs have been covered, additional revenue will drop more or less straight to the bottom line.
Of course, similar things can be said of almost any transport business, so how good of a job has UBS done on past transport picks?
Let's go to the tape
As it turns out, UBS does pretty well in the road and rail sector of the economy, scoring better than 70% accuracy on its recommendations, including sizable wins on stocks like Union Pacific
Of course, these three do sell for considerably lower multiples than their sexier, air freight siblings. At 17.2 times trailing earnings for Union Pacific, 14.7 for Canadian Pacific, and 16 for CSX, they all look quite a bit cheaper than the 25.6-times multiple to trailing earnings on UPS, or the 19 multiple that FedEx carries.
A modest, Foolish, suggestion
Could this be the real secret to UBS' success? Picking cheap stocks? Granted, the air carriers are expected to grow faster than their grounded rivals, resulting in the lower forward multiples UBS mentions. But still, when you base your valuation on actual, known results as opposed to educated guesses about the future, FedEx looks a smidge pricey at a PEG ratio of 1.1, and UPS positively pricey at a PEG of 1.4.
From my point of view, though, UBS is right to favor the air companies this week -- or at least one of them. Sure, you can hedge your bets and buy both. But to my Foolish eye, there is a clear winner between the two: UPS.
Despite having the highest P/E and a midrange growth rate of just 12.4% over the long term, UPS boasts a sizable advantage over FedEx in the field of free cash flow. Whereas here in the doldrums of an economic downturn, FedEx is only just free cash flow-positive on its business, UPS produces simply gargantuan piles of cash; more than $3.1 billion over the past 12 months, or fully 37% better than its reported profits under GAAP.
This gigantic disconnect between reported earnings and actual free cash flow has UPS selling for a price-to-free cash flow multiple of barely 18.3, and puts the stock very close to "value" territory when you factor in its similarly sizable 3.2% dividend yield.
In the race to deliver value to investors, I think UPS beats FedEx, hands-down.
