3 Global Leaders in the Logistics Industry
Victor is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Unlike the companies in my previous article, FedEx (NYSE: FDX), United Parcel Service (NYSE: UPS) and TNT Express (NASDAQOTH: TNTEY) may be better known by the broader public as they offer logistics and transportation services for individuals, as well as for corporate clients. Some offer more compelling growth prospects and interesting entry points for investors than others. Let's take a look at them and try elucidate which one stands as the best destination for out money.
A key player
UPS is the biggest parcel delivery service in the world, transporting over 16 million packages a day (on business days, in average). Its scale provides it with several competitive advantages. For starters, it helps it keep its competitors lagged, unable to even imitate such a structure. For instance, its shipment volumes almost double those of its closest competitor, FedEx. In addition, its size allows it to spread costs amongst larger customer volumes and reach more places than any other. Furthermore, its integrated assets model permits it, unlike FedEx, to use the same assets for U.S. express and ground deliveries, earning greater margins than its peers (Morningstar).
The company has also developed considerable customer stickiness thanks to its reliable service and employees, especially drivers. This, alongside the expansion in the package shipping market and steady price increases, leads analysts to predict a growth rate around 11%-12% for the upcoming five years or so. Moreover, this has also meant that UPS has offered constantly increasing revenue and margins over time and has had the ability to generate outstanding returns on capital and free cash flow (about 5%-11% of sales). This has enabled strategic purchases to expand the business´ footprint worldwide; the most recent acquisitions include the Belgian e-commerce firm, Kiala, and the Italian pharma logistics provider, Pieffe Group, amongst others. This last one was carried out within a plan to expand in the healthcare business, that already counts with considerable presence and specific distribution facilities in the U.S., Canada, Latin America, Singapore, the Netherlands, and Australia and also comprises deals with pharma giants like Merck. Finally, its excess cash has also permitted the firm return value to stockholders through its 2.8% dividend yield and plenty of stock repurchases over time.
Even exchanging at 98 times its earnings, well above its peers, I'd recommend taking a closer look, or even buying and holding on to this stock, as long-term results are poised for the upside and could surprise even the most optimistic of investors, as the firm´s scale and profit continues to develop while its competitors remain laggards.
Another best choice
As the second biggest package delivery firm in the U.S. and having stricken a deal with the U.S. Postal Service for an estimated value of approximately $10 billion, I believe that FedEx deserves a close look as well. Expected to deliver over 12% in annual EPS growth over the upcoming 5 years, several growth catalysts can be found within the company. For starters, its scale makes it difficult for other companies to compete, as evidenced by the exit of DHL from the U.S. domestic delivery business. The company owns ground delivery, less-than-truckload, air and ocean freight assets. This, combined with its worldwide presence and its 50,000 drop boxes, makes this firm a strong competitor poised to grow.
The company is expected to benefit from consistently increasing shipping rates, fuel efficiency and e-commerce. Furthermore, the firm set a target of $1.6 billion in incremental profit for FedEx Express to be achieved by the end of 2016, mainly on the back of infrastructural developments (Zacks). Also, the firm decided to reduce its presence in lower yield markets, namely, in Asia.
Moreover, due to weak earnings last quarter, the stock price is somewhat beaten down. An interesting entry point appears and I would advise buying this stock before next quarter´s earnings report. Rest assured that, although results may not look encouraging for the short term, the firm´s structure and history overcoming economic cycles makes it evident that it will continue to profit in the years to come. Trading at only 17.5 times its earnings, versus the 71.9 industry average, I´d recommend not letting this chance pass on you.
A European company with no clear way
Finally, there’s European freight giant, TNT, which had started 2013 with a high stock price that plummeted by almost 50% after UPS announced that it would not be able to complete the much anticipated purchase of the firm due to a lack of approval from the E.U. antitrust regulators. However, UPS had to pay $257 million in merger termination fees so, while stock price descended, TNT´s net profit grew by almost 1000%, to $185 million.
This last might be one of the few silver linings in TNT´s past year. Financial figures were not good for 2012, while 2013 started with its CEO resigning. Following the failed merger, the management has much work to do in order to achieve a turnaround. Cost cutting initiatives came first, and started with personnel layoffs across Europe –about 4000 jobs cut- and the retreat from unprofitable or small operations, like those in Brazil and China.
Several attempts to go on with the purchase are still going on, including appeals from UPS, and offering to sell out its airline subsidiary, in order to comply with antitrust laws that forbid non-E.U. companies to be majority owners in E.U.-based airlines. As the UPS acquisition becomes less likely and a Deutsche Post buyout is also to be discarded, FedEx stands like the only firm that could actually buy TNT. Although this seems pretty improbable, it is an outcome that should be discarded by shareholders, especially as PostNL, the largest single stockholder has declared to maintain committed with finding a buyer for the company. At the current price, the stock is definitely not a sell and could even stand as a buy opportunity, for those willing to take the risk, as room for improvement and valuation upside is much. However, I, myself, would hold for now, until events start evolving and portray a clearer outlook.
While both UPS and FedEx present clear and compelling growth catalysts and prospects, TNT remains in an uncertain path. Although UPS is the largest in scale and could grow the most, I’d recommend buying FedEx stock, as its outlook is pretty interesting while its valuation remains quite reasonable, considerably below the industry average.
Victor Selva 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!