Making Money with Shipping Giants FedEx and UPS
Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With the increase in e-commerce there is money to be made in shipping companies, even more so if you think that the economy is going to make a comeback. There are two names at the top of the shipping pile that have a huge moat and are probably untouchable, even in the long term. Those companies are UPS (NYSE: UPS) and FedEx (NYSE: FDX).
Can Only Go UPS from Here
UPS is a name that most of us recognize. Amazon (NASDAQ: AMZN) seem to use UPS the most for shipments in my area and their service continues to grow in the United States. A quick look at the information we have for UPS from their filings shows us that net income has grown over the last three years. Sales have also grown over the same period, and I project that they will continue to grow.
The biggest portion of UPS is their U.S. shipping of packages. The U.S. is obviously a big country, and UPS has not yet conquered this market. In terms of competition there is FexEx, DHL, and the government-run USPS. I don’t see UPS taking too much from FedEx but I do think that the two will continue to grow side by side in this area.
Outside of the United States, UPS continues to grow their international package shipping business. International expansion is something that UPS is pushing for, and they will likely succeed in becoming the major shipping company worldwide.
UPS’ supply chain and logistics division makes up less than 10% of the company’s value but, like the rest of the company, I believe it will grow. UPS’s margins are a lot less on their supply chain operations than they are on packages so this division will likely remain one of the smaller areas at UPS.
For some reason Cast Away always comes to mind when I think of FedEx. There’s really no need for that though, this international shipping machine has never lost one of my packages and I don’t think they lose too many of their planes over the Pacific.
Like UPS, FedEx make most of their money through ground shipments. It is a lot bigger portion of their company, which makes them a little less diverse than UPS. Even being that little bit less diverse, I still feel that FedEx is a great business that experiences the benefits of the huge moat that both shipping giants share.
One of the major problems facing the shipping industry is the price of crude oil. If the oil goes up, these companies face tighter margins. Of course, this could play out in the opposite way with a drop in the price of crude.
Another potential, but highly unlikely, outcome is that governments will exert more control over shipping, limit prices or even push their own product (USPS) over that of the private enterprise. Like I said, unlikely.
The craziest thing I could come up with is the problem area is that 3D printers will eventually print the products we order. They’re already printing organs, is it really out of the realm of possibility that some years down the line they can print my iPad?
Could the USPS Fold?
The USPS has been losing taxpayer money for years now. It would not be crazy to think that one day this entity will be removed from the government books. This would give UPS and FedEx a big business boost in the delivery of regular mail if it were to happen.
The Amazon Effect
I think that both UPS and FedEx fall into the Amazon effect. They are one of the many companies that Amazon helps out on a daily basis. Without Amazon, or e-commerce for that matter, UPS and FedEx would not be the size that they currently are.
As shipments from Amazon continue to increase and other businesses begin to move online, we can expect bigger shipments from these two juggernauts.
Buy one, buy them both, it’s up to you. I see a huge moat around each company and both have huge potential for growth in the long term.
I like UPS over FedEx due to its dividend being a lot higher. If you can’t decide I really don’t see a fault in owning both companies in a well-diversified portfolio.
Ash1402 has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend Amazon.com, FedEx, and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!