Facebook
Twitter
The holiday shopping season is in full effect, but it’s not the retail stocks you should be focusing on.
For starters, Black Friday was rough. Foot traffic was lower than expected, with shoppers spending less.
Consumers are spending more online and less in stores, which isn’t just great news for online retailers: It’s also a big positive for shippers. This is peak season for package shipping companies like FedEx (NYSE: FDX) and United Parcel Service (NYSE: UPS).
The Shifting Shipping Industry
FedEx and UPS will win this holiday season for a number of reasons. First is the fact that there are more people shopping online. In terms of online sales, the National Retail Federation has online holiday sales rising 8% this year – faster than the 5.8% growth in 2014. The leading online retailer, Amazon.com (NASDAQ: AMZN), expects sales to grow by 15% to 25% this quarter.
The second reason that UPS and FedEx win this holiday season is the fact that more brick-and-mortar stores are looking to unload inventory and carry less product going forward. Right now, physical stores are sitting on record-high inventories.
Retailers are increasingly pushing online sales and ship-from-store services. Then there are inventory management tactics, which will help keep them from having leftover product at the end of the holiday season (which tends to quickly fall out of fashion). What this means is fewer products held in-store, which should lead to more reorders.
UPS and FedEx will benefit from an increase in smaller deliveries made from the manufacturer or wholesaler to the store. So instead of keeping large amounts of products, they’ll keep a fraction of it and just make smaller, more frequent, reorders.
Let’s Talk Numbers
UPS expects deliveries will increase 10% to a record 630 million packages between Black Friday and New Year’s Eve. FedEx sees deliveries up roughly 12% for that period.
But FedEx shares are down 15% year-to-date, while UPS is off just 8%. This has put FedEx trading at just 12 times next year’s earnings estimates while UPS is at 17 times.
It’s an interesting discount for FedEx, which is expected to grow earnings faster than UPS and has a superior balance sheet. Over the next five years, FedEx is expected to grow earnings at a rate that’s 40% higher than UPS. And FedEx’s debt-to-capital is just around 30%, while UPS is above 80%.
Where UPS does win is with its 2.9% dividend yield. FedEx is offering just a 0.7% yield. However, FedEx might still have a leg up when it comes to being a worthwhile investment.
Pick Up This Holiday Stock
FedEx has a sprawling operation, with a large fleet of airplanes. This type of footprint is unrivaled, which gives FedEx the ability to raise rates without much pushback. A few months ago it announced a 4.9% increase in rates.
Now, FedEx is lagging UPS when it comes to margins, but this is more of an opportunity than a setback. FedEx has already recognized the issue, largely experienced by rising expenses in its FedEx Ground business and demand declines in the less-than-truckload business.
FedEx is still seeing increased demand on the whole and expanding margins in its Express business. It’s already showing discipline in the pricing of Ground packages, including a rollout of dimensional pricing on small parcels.
All this creates an opportunity for FedEx to close the gap on UPS in terms of margins and valuation, while also benefiting from the holiday shopping season.
Worry-Free Riches
They’re owned by some of the wealthiest people on the planet. They share a few key similarities that distinguish them from 99% of equities. Even as the S&P keeps breaking record highs, they’re still crushing it. In fact, over the last ten years they’ve outpaced it by a colossal 390%.