United Parcel Service (NYSE:UPS), a package delivery company, providing transportation, logistics, and financial services in the United States and internationally is a stock to avoid. This article discusses the reasons to be bearish on the stock and a better stock in the logistics sector to consider.
The most immediate reason for being bearish on United Parcel Service is the company’s most recent second quarter results. UPS announced adjusted diluted earnings per share of $1.21 for the second quarter of 2014, a 7.1% improvement over the prior year period.
On the positive aspects first, for the six months ended June 30, UPS generated $1.0 billion in free cash flow. The company paid dividends of $1.2 billion, up 8.1% per share over the prior year, and repurchased 13.7 million shares for approximately $1.4 billion.
On the negative aspects, UPS lowered its expectations for adjusted diluted earnings per share to be in a range of $4.90 to $5.00. In 1Q14, the company had announced that it expects the diluted earnings per share to be at the low end of our full-year guidance range of $5.05 to $5.30. Therefore, in both the quarters of 2014, UPS has lowered its outlook and sentiments are bearish even if the stock makes a bounce-back in the long-term.
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- UPS 15-Year Financial Data
- The intrinsic value of UPS
- Peter Lynch Chart of UPS
At a current stock price of $98.55, United Parcel Services is trading at a PE of 19.7 considering the upper end of the revised EPS guidance.
On the other hand, FedEx (NYSE:FDX) reported strong results for the quarter and year ended March 2014 and also issued a strong guidance for 2015. For 2014, the company reported a diluted EPS of $6.75 and for 2015, the company guided for a diluted EPS of $8.5 to $9.0 per share.
At a current stock price of $148 FedEx is therefore trading at a forward PE of 16.4 considering the higher end of the EPS guidance for 2015.
Therefore, on a relative basis, FedEx is trading at a discount as compared to United Parcel Services. Investors can therefore still consider FedEx at current levels for more upside. For United Parcel Services, investors need to wait before the company announced more optimism in their outlook.
FedEx is ahead of United Parcel Services even in terms of long-term growth. Analyst estimates suggest that FedEx’s earning is likely to grow at a CAGR of 14.5% over the next five years as compared to 11.4% expected earnings growth for United Parcel Services.
Therefore, FedEx is ahead even in terms of long-term growth prospects. The long-term undervaluation is evident from the fact that FedEx trades at a PEG (5-year expected) of 1.14 as compared to United Parcel Services trading at a PEG (5-year expected) of 1.74.
I also believe that FedEx has an upper hand in terms of investment and the direction of investment. For 2015, the company’s capital expenditure is $4.2 billion and this primarily includes expenses related to aircraft deliveries, which support the company’s fleet modernization program. Fleet modernization will help FedEx improve its margins significantly over the next few years and this provides the company an edge over peers.
United Parcel is ahead of FedEx in terms of dividend payment and yield. The company has a current dividend yield of 2.6% as compared to a dividend yield of 0.5% for FedEx. However, FedEx has performed exceedingly well in terms of stock appreciation.
Over the last one year, FedEx stock has gone higher by 43% while United Parcel Services has moved higher by just 13%. The stock upside difference is a reflection of the recent performance by both companies and FedEx is likely to move higher strongly in the future as well on the basis of factors discussed.
In conclusion, United Parcel Services is unattractive at this point of time as compared to FedEx. United Parcel Services is struggling to grow at a robust pace and FedEx is continuing to perform exceedingly well. Again, United Parcel Services is also a shareholder value creator, but the stock needs to be watched from the sidelines for now.