From The Motley Fool , publication date: May 17, 2013
The second largest U.S. package delivery company, FedEx (NYSE: FDX) , and the
world’s largest package-delivery company, the United Parcel
Service (NYSE: UPS) or
UPS, have delivered contrasting results. While the former reported a rise
in revenues and a sharp drop in earnings, the latter saw increasing top and
bottom lines – despite the setbacks coming from the failed acquisition bid
for the European package delivery giant TNT Express (NASDAQOTH:TNTEY) . FedEx,
however, captured global headlines due to a deal with the U.S. Postal Service
even though the deal might not be as attractive as investors would
have liked.
The TNT bid
UPS’ bid to purchase TNT Express for $7 billion was blocked
by European Union regulators in January. TNT is the world’s fourth-largest
package delivery firm, with a market cap of more than $4 billion. Its
shareholders were excited at the prospect of a possible deal, but its stock
plummeted by 50% on the day that the EU regulators vetoed the deal. The
metaphorical silver lining, however, was that the net profit in TNT's
most recent earnings report rose almost 10 times to $185 million due to the
$257 million merger termination fee it received from UPS . Excluding that,
however, the company's performance was less than satisfactory. The
company’s adjusted earnings before interest and tax from continuing
operations fell 16% from the previous quarter to $49.5 million as revenues
dropped 4.5% to $2.15 billion. Without UPS, TNT will have a challenging future
ahead, particularly in Europe. The company's cost cutting plans, including the
elimination of 4,000 jobs and divestment from less lucrative operations, are
now back on the table.
Earnings
FedEx reported its 3rd
quarter earnings on Mar. 20, beating revenues but failing to meet earnings
estimates. Revenues rose 4% from the same quarter last year to $11 billion,
which is about $150 million above estimates, while net income dropped 31% to
$361 million. This translated into earnings of $1.23 per share, as opposed to
that $1.38 per share that was expected. Operating income fell by 28% from $813
million to $589 million, while the company's operating margin fell to 5.4% from
7.7% last year. UPS, on other hand, reported revenue growth of 2.21%, climbing
from $13.14 billion to $13.43 billion but fell short of Wall Street’s
expectations of $13.46 billion. Net income rose 6.9% to $1.04 billion or $1.08
per share, however, which was significantly above analysts’ expectations of
$1.01 a share. Operating profit was $1.58 billion, showing a modest rise from
$1.57 billion, while the operating margin fell slightly to 11.8% from 11.9%.
Growing segments
FedEx Express reported revenues of $6.70 billion, showing
growth of 2% from last year’s $6.54 billion and coming in $100 million short of
estimates. Its operating income fell an enormous 66% to $118 million from the
$349 million a year ago as customers switched towards cheaper alternatives. The
Ground segment reported revenue of $2.75 billion, showing a growth of 11% from
last year as its average daily volume rose 10%. FedEx SmartPost reported a 26%
surge in volume due to an increase in e-commerce activities, though its operating
income rose by just $2 million to $467 million. FedEx Freight’s revenues also
increased slightly to $1.24 billion, but the unit swung to an operating income
of $4 million from a loss of $1 million last year.
2012
|
2013
|
% Change
|
|
FedEx Express Segment
|
|||
Revenue
|
$6.54 Bn
|
$6.7 Bn
|
2.4%
|
Operating Profit
|
$349 M
|
$118 M
|
-66.2%
|
FedEx Ground Segment
|
|||
Revenue
|
$2.48 Bn
|
$2.75 Bn
|
10.9%
|
Operating Profit
|
$465 M
|
$467 M
|
0.4%
|
FedEx Freight Segment
|
|||
Revenue
|
$1.23 Bn
|
$1.24 Bn
|
0.8%
|
Operating Profit
|
$4 M
|
-$1 M
|
-
|
Meanwhile, UPS reported a 3% growth in revenues and a 9%
growth in earnings in its US domestic package operations. This came on the back
of a 5% growth in volume by UPS Ground. The company's international package
segment showed lackluster performance, despite an 8% increase in its Asian
daily export volume. Moreover, the millions spent on the attempted acquisition
discussed earlier have also dragged the unit’s income. The income from the
supply chain and freight segment fell 14% due to the overcapacity in transpacific
trade, a factor that is hurting the margins across the industry.
2012
|
2013
|
% Change
|
|
U.S. Domestic Package
|
|||
Revenue
|
$8 Bn
|
$8.27 Bn
|
3.4%
|
Operating Profit
|
$995 M
|
$1.08 Bn
|
9.0%
|
International Package
|
|||
Revenue
|
$2.97 Bn
|
$2.98 Bn
|
0.3%
|
Operating Profit
|
$408 M
|
$352 M
|
-13.7%
|
Supply Chain & Freight
|
|||
Revenue
|
$2.17 Bn
|
$2.19 Bn
|
0.9%
|
Operating Profit
|
$166 M
|
$143 M
|
-13.9%
|
In the three-month period ending in March, UPS generated
free cash flow of $1.4 billion. Indicating its confidence on the cash outlook,
the company's management has reauthorized the $10 billion share repurchase
program.
The USPS contract
FedEx received a $10.5 billion contract with the US
Postal Service to extend its domestic air transportation services for seven
more years as the company's current deal with the USPS approaches its end in
September. Naturally, UPS was also eyeing the mega-contract but FedEx’s
shareholders can breathe a sigh of relief. FedEx has attributed its symbolic
victory over UPS to its “competitive” bid, which in other words
likely means that the new contract has lower margins than the existing
one. I don’t think the deal is particularly lucrative for FedEx, though the
other option – losing the contract, or losing even 20% to 30% of it to UPS --
was much worse.
In the last six months, shares of UPS have risen by 22% and
have outperformed both FedEx as well as the S&P-500 ETF (SPY) which
is up 18% in the corresponding period. UPS’s shares are six times more
expensive than FedEx but the former still gives more than three times as much
yield.
FedEx
|
UPS
|
|
Stock 6M
|
+12.7%
|
+21.9%
|
P/E
|
16.55
|
98.37
|
EPS
|
5.71
|
0.90
|
Yield
|
0.60%
|
2.90%
|
Beta
|
1.25
|
0.91
|
ROA
|
4.30%
|
2.30%
|
ROI
|
7.60%
|
5.80%
|
Conclusion
In essence, UPS delivered much better earnings than its
rival by posting an increase in both revenues and income, despite its
international operations remaining under pressure. With the USPS deal, however,
FedEx has taken the spotlight from UPS.
Moreover, although UPS has appealed to the EU regulators to
challenge their decision I am not expecting any developments there in the short
term if at all. I say this primarily because the appeals process is a very
lengthy and bureaucratic one which takes an average of two years, and UPS’
appeal can only become stronger if FedEx purchases some of UPS’s European
assets – which would allay the fears over fair competition – which I believe is
highly unlikely at the moment.
