The Expense of Shipping
Tyler is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In American society, people have just a couple of options for how to ship packages. Is one cheaper than the other? What about performance? Is there more opportunity surrounding companies that provide business to these businesses?
Who is there?
You have seen the commercials, ads and trucks. FedEx (NYSE: FDX) has definitely made a name for itself despite its largest competitor being 2.5 times as large. We know about FedEx, but we also know about the brown trucks of UPS (NYSE: UPS). People have their preferences and I'm not here to argue which company you should give your business to but, rather, which company can make you more money.
Besides the companies that actually ship packages, there is another company that gives them a huge amount of business. Just how much business does Amazon (NASDAQ: AMZN) provide? Well, in 2012, Amazon sold as much as 306 items per second. That's equivalent to 18,360 items per minute, or 26.4 million items per day. That's a lot of business, and a lot of packages that need to be shipped. So, what companies offer the most growth opportunities and which one offers the best value?
Round 1: Valuation
Price isn't everything, but it is definitely something investors should be interested in. There is no nice way to put this -- Amazon is expensive. You will pay a very high premium to invest in this company. The good news is that Amazon is young, growing and putting money towards future growth. In the past five years, it has increased its capital expenditures by 1,222%, showing an unrelenting desire to grow for years to come.
As for UPS and FedEx, there might be a slightly better premium. FedEx shows a free cash flow yield of 4%, while UPS shows a free cash flow yield of 5.3%. FedEx has an earnings yield of 5.5% while UPS's is 1%. Both of these companies have an elevated P/E ratio, but UPS is outrageous. Although FedEx's P/E is 17.3, and may be too high for true value investors, it is much cheaper than that of UPS, which is 98. It doesn't appear that any of these companies are very cheap, but FedEx would have to win this round.
Round 2: Performance
This might be a perfect example of the old saying, "You get what you pay for." For starters, Amazon does not offer any dividends to its shareholders, but UPS and FedEx do. FedEx has a dividend yield of 0.6% while UPS has a dividend yield of 2.7%. Year to date, UPS has increased 19%, Amazon is up nearly 11%, and FedEx is up nearly 8%. However, Amazon has more than doubled the performance of both other companies over the past year. It is up nearly 30%, while FedEx and UPS are up 13.8% and 13.3%. Back up a little farther, and Amazon continues to dominate in the performance category. The graph below shows how these companies have done over the past year.
Round 3: Growth
Neither UPS or FedEx have a business model that allows them to grow to the extent that Amazon can. UPS and FedEx are largely dependent on companies like Amazon for their business. They don't have much of a competitive advantage, where Amazon has completely revolutionized the retail industry.
Amazon has phenomenal growth prospects for the upcoming years. Amazon Prime and AmazonFresh are probably Amazon's largest areas for growth. Prime members pay an annual membership fee of $79, spend double the amount of non-members and 92% of members plan on renewing their membership. Morningstar analyst R.J Hottovey expects a 250% increase in Prime members by 2017. AmazonFresh will allow users to pay an annual fee of $299, which includes a Prime membership, and get same day delivery on any groceries they purchase over $35. AmazonFresh is the same concept as Amazon Prime, and opens the company up to a new $850 billion industry. Amazon clearly wins in the category of growth.
The bottom line
It appears that this time, "You get what you pay for" may actually be true. Amazon may be very expensive, but it also has tremendous growth opportunities and provides solid performance. None of these companies are very cheap, but FedEx is arguably the best valued company of these three. Dividends? That goes to UPS. The moral of this story? Every company has its advantages. Every investor has a different objective, and one of these companies likely meets one.
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Tyler Wofford has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, FedEx, and United Parcel Service. The Motley Fool owns shares of Amazon.com. 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!