Stock Wars: Grading Two Delivery Giants
This week, I use AAII’s A+ Stock Grades to give you insights into two package delivery giants that are benefiting greatly from record online sales this year: FedEx Corp. (FDX) and United Parcel Service Inc. (UPS). After record-setting Black Friday and Cyber Monday online sales, the package delivery and shipping services competitors are ready for a busy holiday season.
FedEx and UPS Delivering for the Holidays and Beyond
E-commerce became an essential part of life for shoppers and businesses after the spread of the coronavirus. The trend continues as the pandemic has forced more shoppers to stay home and shop online during the holidays. According to data from Adobe Analytics, consumers spent $9 billion on Black Friday, up around 22% from last year, to set a new online record for the day after Thanksgiving. Cyber Monday was even better, with $10.8 billion in sales, up 15.1% from a year ago and breaking a record for the largest U.S. online shopping day ever. More and more, the future of retailing is online.
To adjust to shopping changes due to the pandemic, large retailers attempted to move the start of the holiday shopping season forward this year by offering doorbuster deals and significant discounts online in early October. Many retailers also encouraged customers to order online and then safely pick up their purchases in stores or curbside. The goals were to get shoppers to buy online rather than crowding in stores and to spread out the number of packages being shipped at any one time to avoid capacity issues on delivery companies’ networks.
Despite an increase in online ordering with store pickup, most shoppers are having purchases shipped directly to their homes. The New York Times reports that an estimated three billion packages will move through the nation’s delivery infrastructure, which is about 800 million more than were delivered last year. To deal with the surge in deliveries, package and freight shipping companies — specifically, FedEx and UPS — have expanded weekend deliveries and hired more workers. By one estimate, 7.2 million more packages need to be shipped each day this holiday season than the system has the capacity to handle.
If you plan on doing your holiday shopping online and haven’t done it yet, you better get moving because with the surge in volume, you may have more luck coordinating your delivery with Santa and his reindeer than with FedEx and UPS. The year-to-date performance for FedEx and UPS has been impressive, with the two stocks up 96.4% and 43.1%, respectively. Let’s evaluate FedEx and UPS using AAII’s A+ Stock Grades to determine how attractive the two delivery giants’ stocks are based on their fundamentals today.
AAII’s A+ Stock Grades is a stock-grading system based on percentile rankings of multiple key metrics within five investment factors: value, growth, momentum, earnings estimate revisions and quality. The A to F grades on each factor give summary ratings on a company’s fundamentals.
The following table summarizes the stock grades for global package delivery companies FedEx and UPS.
What the A+ Stock Grades Reveal
FedEx provides air express and ground package delivery services to residential and business locations globally, as well as truck freight and logistics services. The company provides a portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively under the FedEx brand. The company’s segments include FedEx Express, TNT Express, FedEx Ground, FedEx Freight and FedEx Services.
FedEx has a positive A+ Estimate Revisions Grade of B, which is based on the magnitude of a company’s last two earnings surprises, using the SUE (standardized unexpected earnings) score and the percentage change over the last month and last three months in the consensus estimate for the current fiscal year.
With its stock up over 96% for the year, FedEx has a Value Grade of C, based on its score of 53, which is considered average. The company’s Value Score ranking is based on several traditional valuation metrics. FedEx has a score of 31 for the price-to-sales ratio, 78 for the price-earnings ratio and 70 for the price-to-book-value ratio (remember, the lower the score the better for value).
The company has a B grade when it comes to price momentum based on the weighted four-quarter relative strength. Momentum is based on the price change of a stock over a specified period relative to all other stocks. FedEx has a strong A+ Growth Grade of B, which looks at growth in sales, diluted earnings per share from continuing operations and operating cash. The company saw sales increase by over 13.3% for its latest quarter versus one year ago.
UPS is the world’s largest package delivery company. It is also a supply chain and freight transport facilitator, offering a variety of non-package services, including air and ocean freight forwarding, customs brokerage and truck freight services. In 2019, UPS served 1.6 million shipping customers and more than 9.9 million delivery customers daily.
The pandemic is accelerating long-term global growth of e-commerce, providing a substantial volume boost to UPS due to its large business-to-consumer delivery operations. The lack of demand for air travel during the pandemic is also severely restricting commercial airline cargo capacity; this is leading to higher prices for UPS, which handles its own air shipments. UPS is also benefiting on the cost side from this year’s drop in oil/fuel prices.
UPS has a Value Grade of D, based on its score of 65, which is considered to be in the expensive range. The Value Grade is the percentile rank of the average of the percentile ranks of the price-to-sales ratio, price-earnings ratio, enterprise-value-to-EBITDA (EV/EBITDA) ratio, shareholder yield, price-to-book-value ratio and price-to-free-cash-flow ratio. UPS has a score of 43 for the price-to-sales ratio, 76 for the price-to-free-cash-flow ratio and 96 for the price-to-book-value ratio (remember, the lower the score the better for value).
The A+ Quality Grade is based on having a ranking for at least four of eight quality measures — return on assets (ROA), return on invested capital (ROIC), gross profit relative to assets, buyback yield, change in total liabilities to assets, management’s use of accruals, Z double prime bankruptcy risk (Z) score and F-Score. Stocks receive better grades for having higher scores for the quality sub-components.
UPS has a quality score of 88, which is very strong and translates to a Quality Grade of A. The company’s return on assets is 7.5% and its gross income to assets is 101.5%, which contribute to its very strong Quality Grade.
The company has a strong A+ Growth Grade of B, which looks at quarterly year-over-year growth in sales, diluted earnings per share from continuing operations and operating cash, as well as annualized growth over the last five years for these three elements. The company saw operating cash increase by over 124% for its latest quarter versus one year ago.
The company has a positive A+ Estimate Revisions Grade of B, which is based on the magnitude of a company’s last two earnings surprises, using the SUE (standardized unexpected earnings) score, and the percentage change in the consensus estimate for the current fiscal year over the last month and last three months.
The company has an C grade when it comes to price momentum, based on the weighted four-quarter relative strength. Momentum is based on the price change of a stock over a specified period relative to all other stocks. It is considered to be an anomaly in the analysis of stock returns because stocks with high relative levels of momentum tend to continue to outperform, while stocks with low relative levels of momentum tend to continue underperforming.
The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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