The e-commerce industry has completely upended the fortunes of the centuries-old transportation and logistics industry. Despite its growth in the last decade, e-commerce only holds a small percentage of the retail industry’s overall volume. It is due for strong growth in the next decade, which, in turn, will help logistics companies such as United Parcel Service (UPS, Financial) and FedEx (FDX, Financial). We are already seeing evidence of that.
Both these companies are in firm control of the U.S. market and, due to the capital-intensive nature of the industry, there is no way a new-age competitor can rise and disrupt the duopoly that exists. But out of the two, which one is a better buy?
From a sheer price multiple standpoint, FedEx looks a bit better than UPS. At the time of Ă‚ writing, UPS is trading at 1.55 times sales and 18.15 times earnings, while FedEx is trading at 0.94 times sales and 17 times earnings.
One of the reasons for the slightly better valuation for UPS is that, when it comes to margins, it historically has remained ahead of FedEx, often exceeding 10% levels. FedEx touched double-digit margins only once in the last 10 years.
According to a Motley Fool article, UPS earns higher margins compared to its peers because it funnels greater package volumes. The article goes on to say that “handling greater parcel density helps reduce overall per-parcel shipping costs, but the strategic use of assets also makes a significant difference. UPS uses many of its assets to handle both express and ground shipments, earning greater margins compared with other parcel shippers like FedEx.”
UPS not only makes more money than FedEx, but its bottom-line profitability is also much better than that of FedEx. FedEx has intensified its investments in the form of $4.85 billion toward capital expenditure in 2016, while UPS spent only $2.965 billion. Although the company has been spending a lot more than UPS in terms of capital expenditures for the last decade, the results are yet to be realized. This clearly shows the advantage UPS enjoys when it comes to operations.
On the revenue front, UPS reported $16.9 billion for the fourth quarter of 2016, which ended in December 2016. FedEx, fresh after the acquisition of TNT Express, reported revenue of $14.9 billion for its fiscal second-quarter 2017, which ended in November 2016. FedEx closed the gap with UPS when it comes to revenues, but the company has a long way to go before it can match the efficiency of UPS.
UPS’ valuation is slightly better than FedEx’s at current levels, which makes it a better investment. But considering the duopolistic nature of the market and the crucial role the segment will play in e-commerce growth over the next decade, investors should consider buying both companies and continue to buy during the dips. This is one investment you can hold on to forever.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
Start a free 7-day trial of Premium Membership to GuruFocus.
