In one article few months before, I had written that United Parcel Service (UPS, Financial) is not a buy while for FedEx (FDX, Financial) the momentum remains positive in the medium term. In this article, I will discuss the latest results announced by UPS and the reaffirmed guidance by FedEx that backs my bearish view on the former and bullish view on the latter.
On January 23, 2015, UPS announced that it anticipates fourth quarter 2014 adjusted diluted earnings per share of approximately $1.25. Further, the company expects full-year 2014 diluted earnings to be approximately $3.28 per share, compared to $4.61 in 2013.
Therefore, the company’s earnings projection is even lower than the previous guidance and the poor results are attributed to underperformance of the U.S. Domestic segment. In line with the dismal results, UPS stock slumped by 9.9% to $102.9. I believe that the weak stock performance is likely to continue in the coming quarters and UPS will continue to trend lower.
The reason for believing that UPS will continue to deliver relatively poor results is the following comment from the company:
"The rapid expansion of ecommerce has created a complex operating environment during peak season," said Kurt Kuehn, UPS chief financial officer. "UPS is in the early stages of a multi-year initiative to adapt our operations to these market challenges. We are making progress, but this quarter reflects that more work needs to be done."
With the company still at an early stage when it comes to adapting to the new market challenge, it is entirely likely that the coming quarters will be equally challenging for UPS. Further, the company now anticipates 2015 diluted earnings per share growth to be slightly less than its long-term target of 9%-to-13%. I would not be surprised if the earnings continue to disappoint. Therefore, the best strategy would be to stay away from UPS.
If investors are considering exposure to the sector, FedEx is certainly a good investment option and I expect FedEx to continue its robust growth trajectory in 2015. On January 23, 2015 (the same day UPS released its results), FedEx reaffirmed the guidance that its fiscal 2015 earnings forecast will be in the range of $8.50 to $9.00 per diluted share. The outlook assumes modest economic growth and gains from lower fuel price. Therefore, I believe that this EPS guidance will sustain considering the point that it incorporates the likely impact of an economic slowdown in 2015.
Clearly, FedEx looks attractive on a relative basis and provides a dividend payout of $0.8 per share. I must mention here that UPS provides a dividend payout of $2.68 per share. However, investors can expect more declines in the stock that will more than offset the dividend payout gains. Therefore, in my view, it does not make sense to consider exposure to the stock even for dividends at this point of time. Investors need to wait and watch for the company’s turnaround strategy and its impact on sales and profitability.
From a valuation perspective, FedEx is currently trading at a forward PE of 16.03 while UPS is trading at a forward PE of 18.7. Therefore, FedEx is still undervalued on a relative basis and I expect the stock to move higher over the next 2-3 quarters. At the same time, UPS is likely to trend lower in the coming quarters if disappointing results continue.
In conclusion, FedEx can still be considered at current levels while it would be best for investors to avoid UPS.
