UPS and Air Shippers Offer Steady Returns in the Midst of Global Turbulance
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The global transportation market offers returns and risk. The largest transportation companies like FedEx Corp (NYSE: FDX) and United Parcel Service, Inc. (NYSE: UPS) have billions of dollars of capital invested, expansive distribution networks, and decades of experience. There are large economic moats in this industry which make it easier to fend off foreign competitors like DHL. The oligopoly of FedEx Corp (NYSE: FDX), USPS, and United Parcel Service, Inc. (NYSE: UPS) give strong pricing power and stability within the domestic U.S. Market.
United Parcel Service has seen low revenue growth over the past years. At 1.5% it is negative in real terms. Long term debt is close to 32% of total assets as of 2011 which is greater than FedEx. Earnings per share has continued to decline along with the dividend. The downturn in Europe and the potential break up of the European Union is a definite risk for the company. In 2011 Europe accounted for half of all international revenue. In 2011 international operations provided 28% of operating income though in the past five years this number has greatly fluctuated. International earnings have helped to stabilize earnings when U.S. Operations were under pressure. In 2011 the operating margin was maintained at 11.4%. They have a great amount of capital investment in plants, equipment, trucks, and airplanes. A severe drop of volume would have a serious effect on the bottom line. If the decrease in Chinese growth serious hurts the American economy then earnings would be seriously impacted.
FedEx Corp is the other major public player in the U.S. transportation market. Although this company was started decades after United Parcel Service they have been able to develop a reputable global network and take a strong position in the U.S. domestic transportation market. Revenue growth over the past 5 years has been inline with inflation at 3% while earnings per share has grown at 9.4%. Over the same time period the dividend has grown at 17% but the yield is only .6% which is much less than the 3% of UPS. In 2011 the operating margin is relatively low at 7.5% but this is a significant improvement over the 5.8% of 2009. As of May 31st 2011 long term debt is relatively low at 6% of total assets though total liabilities is around 56% of total assets. With a lower yield, lower EPS growth rate over the past 5 years, and a lower operating margin than UPS. I believe that UPS is the superior investment. Both of these companies command a dominant position in the transportation industry but that does not make them equal.
In addition to these large players the transportation industry has small air shippers which are potential investments. Forward Air Corp (NASDAQ: FWRD) is an air forwarder based in the United States and Canada. Their 5 year earnings per share is negative in real terms while revenue is around 7%. They use an asset-light business model and through the use of truck owner-operators or truck carriers do not need to carry a truck fleet on their balance sheet. Their operating margin is strong at 14.4% in 2011. In the midst of the recession the company still managed to turn an operating profit though the operating margin shrunk to 4.4%.
Air Transport Services Group, Inc. (NASDAQ: ATSG) is another air shipping company but one that is relatively risky and should be avoided. DHL provided 36% of its revenues and the U.S. Military provided 12% of revenues in 2011. Revenue growth and earnings have greatly fluctuated over the past 5 years. In 2011 the operating margin was relatively healthy at 8.6%. During the 2008 recession this company posted a loss while Forward Air did not. Given the large amount of risk posed by having 2 customers comprise 48% of revenues and the volatility in earnings this company would be a very speculative investment.
United Parcel Service is a great company with a strong operating margin and an entrenched position in the global transportation industry. With decades of experience and strong EPS growth this company offers growth a stability. Forward Air offers another way to get into the transportation industry. They were able to maintain an operating profit during the 2008 recession and use an asset-light business model to maintain their agility. They have a wide network throughout the United State and Canada. Shipping and transportation is a backbone of the modern economy and the oligopolized market in the United States can offer consistent and solid profits.
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