FedEx and UPS Enable Laziness and Profit From It

Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I love getting packages in the mail. I am currently waiting on that new Starbucks coffee maker, and I have the UPS tracking page bookmarked. As retailers fall to the big bad internet, it is companies like FedEx (NYSE: FDX) and United Parcel Service (NYSE: UPS) that help the internet companies, and allow us to avoid the malls. For that I thank them.

Obviously, this is not new news to anyone, but logistics companies have this permanence about them (ignore the US postal service). A logistics company has to have good prices, be fast for the price, actually deliver the package, and not break it. It has very little to do about keeping up with the internet generation, or making fickle customers happy. An individual is not going to go with the more expensive shipper, because prices used to be higher at the currently cheaper one. You choose the one that gets your item where you need it to go for a reasonable price.

UPS is the Favorite

The problem with a company that is the heavy favorite is that it is the heavy favorite. Everyone knows about it, and it might be too late to make great money. However, this is logistics; it’s a persistent, long-lived business. I say heavy favorite, because of UPS' price to equity and price to earnings growth. As one would expect, UPS has a dividend. That means unless it is unbelievably expensive and looking for a sharp correction it might not be such a bad buy if you have a long time frame.

UPS has cash that is a little over half of its long-term debt and its debt to equity ratio is through the roof at 1.686. This is not the norm for the industry; its peers have debt levels that are far lower. The same is true for its higher price to earnings. Good signs are positive revenue growth, which I have found to be a rarity for any company, even if the percentage is low. And don’t forget the dividend; at over 3% that is pretty substantial. The same can be said of the absurdly high 24.28 PEG ratio.

Still, the global economy is weak. In the long run there is room for UPS to grow its business and increase revenues, and it seems like UPS is using the depressed economy to lay the foundation for future growth.

FedEx is Less of a Favorite

I am sure some people love FedEx and it is their favorite stock ever. But FedEx has been hurt by the weak and slow economy. Recovery is taking its sweet time, and this might even drive FedEx lower. However, FedEx is well poised for recovery. That is the benefit of being one of the big names in the logistics industry: when things need to be shipped you have business. And things always need to be shipped.

FedEx is embarking upon cost cutting, which should come as no surprise given the economic climate. The first thing I notice in the metrics is the 4% profit margin. UPS has an 8%, which means FedEx could raise this. At least the debt to equity ratio is 0.157, which is far lower than UPS. The cash position is okay, with cash only slightly above long-term debt. That is interesting, considering the low debt to equity ratio.

Once third quarter earnings are reported I will be looking for balance sheet items that add nothing to the company. Things like goodwill make me nervous. Revenue growth is positive for FedEx too, but that number should go up if the economy starts picking up steam.

Conclusion

One important note: the fourth quarter is the holiday quarter. I am sure both UPS and FedEx will see a boost in business as the holidays roll around.  

We are in an economic slump, and these stocks will benefit when we inevitably get back on our feet. They are not going anywhere either; both of them will survive.. Once the economy starts showing some life and I see a good entry I will jump in. This article might be a bit premature, but these two weren't on my Watchlist. They are now.

For a quicker trade you can try for the fourth quarter bump. I will have to look at previous years to see what happens, but I would not look at logistics stocks for short-term trades. I think these are more long-term ones, as long as I can get in cheap.


TheArchivist has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.

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