How FedEx Stole UPS’ Thunder
Sarfaraz is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The second largest U.S. package delivery company, FedEx (NYSE: FDX) , and the world’s largest package-delivery company, the United Parcel Service (NYSE: UPS) or UPS, have delivered contrasting results. While the former reported a rise in revenues and a sharp drop in earnings, the latter saw increasing top and bottom lines – despite the setbacks coming from the failed acquisition bid for the European package delivery giant TNT Express (NASDAQOTH: TNTEY) . FedEx, however, captured global headlines due to a deal with the U.S. Postal Service even though the deal might not be as attractive as investors would have liked.
The TNT bid
UPS’ bid to purchase TNT Express for $7 billion was blocked by European Union regulators in January. TNT is the world’s fourth-largest package delivery firm, with a market cap of more than $4 billion. Its shareholders were excited at the prospect of a possible deal, but its stock plummeted by 50% on the day that the EU regulators vetoed the deal. The metaphorical silver lining, however, was that the net profit in TNT's most recent earnings report rose almost 10 times to $185 million due to the $257 million merger termination fee it received from UPS . Excluding that, however, the company's performance was less than satisfactory. The company’s adjusted earnings before interest and tax from continuing operations fell 16% from the previous quarter to $49.5 million as revenues dropped 4.5% to $2.15 billion. Without UPS, TNT will have a challenging future ahead, particularly in Europe. The company's cost cutting plans, including the elimination of 4,000 jobs and divestment from less lucrative operations, are now back on the table.
FedEx reported its 3rd quarter earnings on Mar. 20, beating revenues but failing to meet earnings estimates. Revenues rose 4% from the same quarter last year to $11 billion, which is about $150 million above estimates, while net income dropped 31% to $361 million. This translated into earnings of $1.23 per share, as opposed to that $1.38 per share that was expected. Operating income fell by 28% from $813 million to $589 million, while the company's operating margin fell to 5.4% from 7.7% last year. UPS, on other hand, reported revenue growth of 2.21%, climbing from $13.14 billion to $13.43 billion but fell short of Wall Street’s expectations of $13.46 billion. Net income rose 6.9% to $1.04 billion or $1.08 per share, however, which was significantly above analysts’ expectations of $1.01 a share. Operating profit was $1.58 billion, showing a modest rise from $1.57 billion, while the operating margin fell slightly to 11.8% from 11.9%.
FedEx Express reported revenues of $6.70 billion, showing growth of 2% from last year’s $6.54 billion and coming in $100 million short of estimates. Its operating income fell an enormous 66% to $118 million from the $349 million a year ago as customers switched towards cheaper alternatives. The Ground segment reported revenue of $2.75 billion, showing a growth of 11% from last year as its average daily volume rose 10%. FedEx SmartPost reported a 26% surge in volume due to an increase in e-commerce activities, though its operating income rose by just $2 million to $467 million. FedEx Freight’s revenues also increased slightly to $1.24 billion, but the unit swung to an operating income of $4 million from a loss of $1 million last year.
Meanwhile, UPS reported a 3% growth in revenues and a 9% growth in earnings in its US domestic package operations. This came on the back of a 5% growth in volume by UPS Ground. The company's international package segment showed lackluster performance, despite an 8% increase in its Asian daily export volume. Moreover, the millions spent on the attempted acquisition discussed earlier have also dragged the unit’s income. The income from the supply chain and freight segment fell 14% due to the overcapacity in transpacific trade, a factor that is hurting the margins across the industry.
In the three-month period ending in March, UPS generated free cash flow of $1.4 billion. Indicating its confidence on the cash outlook, the company's management has reauthorized the $10 billion share repurchase program.
The USPS contract
FedEx received a $10.5 billion contract with the US Postal Service to extend its domestic air transportation services for seven more years as the company's current deal with the USPS approaches its end in September. Naturally, UPS was also eyeing the mega-contract but FedEx’s shareholders can breathe a sigh of relief. FedEx has attributed its symbolic victory over UPS to its “competitive” bid, which in other words likely means that the new contract has lower margins than the existing one. I don’t think the deal is particularly lucrative for FedEx, though the other option – losing the contract, or losing even 20% to 30% of it to UPS -- was much worse.
In the last six months, shares of UPS have risen by 22% and have outperformed both FedEx as well as the S&P-500 ETF (SPY) which is up 18% in the corresponding period. UPS’s shares are six times more expensive than FedEx but the former still gives more than three times as much yield.
In essence, UPS delivered much better earnings than its rival by posting an increase in both revenues and income, despite its international operations remaining under pressure. With the USPS deal, however, FedEx has taken the spotlight from UPS.
Moreover, although UPS has appealed to the EU regulators to challenge their decision I am not expecting any developments there in the short term if at all. I say this primarily because the appeals process is a very lengthy and bureaucratic one which takes an average of two years, and UPS’ appeal can only become stronger if FedEx purchases some of UPS’s European assets – which would allay the fears over fair competition – which I believe is highly unlikely at the moment.
Sarfaraz Khan has no position in any stocks mentioned. The Motley Fool recommends 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!