E-commerce is booming during the pandemic and so are the businesses that deliver shipments to millions of consumers who linger at home.
Demand for delivery services has been so strong this holiday season that United Parcel Service (NYSE 🙂 imposed shipping restrictions on some major retailers last week, such as Gap Inc (NYSE 🙂 and Nike (NYSE :), the Wall Street Journal reports.
This unexpected shift in consumer purchasing trends has already benefited enormously from parcel delivery rivals FedEx (NYSE 🙂 and UPS. Their shares, after fully recovering from the dip in March, are up about 96% and 43% respectively this year.
So if you want to add one of these players to your portfolio at this point, you have to choose between these two competitors and their growth prospects. Let's take a closer look.
FedEx: Early Preparations That Make a Difference
The FedEx corporate restructuring – planned before the pandemic – proved to be a great differentiator in this new environment. Before COVID-19 spread around the world, the company had already switched to seven-day service, expanded its capacity for larger parcels, introduced new routing software, and started pushing more express parcels to the cheaper ground network.
The latest news from the company also showed that it is well prepared to take advantage of this new situation. In September, FedEx reported the highest fiscal first quarter adjusted operating margin since 2017.
Sales were up more than 13% to $ 19.3 billion, a quarterly record for the company, and earnings per share roughly doubled what analysts expected.
Said CEO Fred Smith:
"Our earnings growth underscores the importance of our business initiatives and investments over the years, and in many ways the world has accelerated to meet our strategies."
Before the pandemic, FedEx struggled to gain investor confidence. The main concern in keeping them on the sidelines was the ongoing troubles the European company faced after the costly acquisition of Dutch courier service TNT in 2015. That deal failed to deliver the value investors hoped to see.
Integration challenges and the slowing European economy have cast doubt on the benefits of the TNT deal, with some analysts questioning the wisdom behind this massive venture. But the global health crisis has changed the dynamics, giving management an opportunity to change the business.
FedEx 1 Year Review.
With FedEx shares up more than 30% in the past three months, analysts are becoming more optimistic. According to FactSet, 71% of them even rate the stock as a purchase. Barclays upgraded the stock to equal weight overweight last week, citing "an abundance of growth opportunities" associated with the expansion of e-commerce.
Shares of FedEx closed at $ 301.45 on Tuesday, nearly 1.5% more than that day.
UPS: Facing the Cost Pressures
In many ways, the story of UPS is no different. The company is ideally positioned to capitalize on the e-commerce boom and may be better aligned with customers due to its strong ground operations.
But when you look at the company's stock performance over the past three months, it's clear that investors prefer FedEx to UPS. Shares diverged in early September as FedEx continued its upward course, while UPS underperformed.
UPS 1-Year Review.
UPS shares closed at $ 166.39 on Tuesday, down 0.64% on the day.
The main factor that makes investors nervous about UPS is the company's rising costs, which are eating up margins. Profit margins will again come under pressure as the company increases the costs of handling the volume in peak season.
Chief Executive Officer Carol Tome, who took over in June, told investors in October that they will have to wait until next year for profit margins to improve at the US unit, which is fueling a surge in e-commerce deliveries. expenses.
In contrast, FedEx has managed to control costs with a combination of job losses, reduced incentives, aircraft retirement and delays in some of its planned investment projects.
These concerns have divided Wall Street about UPS's potential, with 54% of analysts rating the stock as a buy, 27% remaining neutral and 19% in the sell camp. Morgan Stanley analysts said last week that UPS is facing "competitive secular threats" that could erode consumer-facing businesses.
Bottom Line
Both FedEx and UPS are benefiting from the surge in e-commerce deliveries in 2020 and there is strong evidence that this trend is indispensable. Overall, FedEx performs better because it manages to keep costs under control even as delivery volume grows. UPS, on the other hand, is struggling to cut costs and improve margins.
