FedEx Vs. UPS: Which Stock Will Have a Happier Holiday?

Waiting outside the mall at midnight on Black Friday is so 20th century — and that�s great news for delivery giants UPS (NYSE:UPS) and FedEx (NYSE:FDX). Although brick-and-mortar sales on the year�s biggest shopping day rose by 6.6%, millions of shoppers bailed on the post-Thanksgiving ritual of mall hopping to take to the web — dropping a whopping $816 billion last Friday alone, according to the research firm comScore.

That 26% increase over last year is great news not only for e-tailers, who expect a record-breaking Cyber Monday �Deal Week,� but the UPS-FedEx duopoly as well. Both companies are banking on e-commerce to drive up their delivery volumes — and profits — this season.

Because FedEx and UPS cater to a time-sensitive delivery market, shippers have few competitive alternatives. Rail and traditional trucking companies can�t compete with the two package firms on fast shipping. And the U.S. Postal Service, which has lost $13.5 billion since the beginning of 2010 and is by all accounts in the death spiral to bankruptcy, is unlikely to rise from the ashes by offering e-mail and document storage.

UPS and FedEx appear confident — both will raise delivery rates by about 5% for 2012.

But in the race for holiday season supremacy, which company is best positioned to win the day? And how will those prospects impact their stock? Here�s how FedEx and UPS stack up in five key areas:

Size

UPS ended 2010 with $49.5 billion in revenue, about $3.5 billion in profit, more than 400,000 employees and a delivery fleet of close to 100,000 vehicles and 266 cargo jets. The company makes an average of 15.6 million shipments a day.

FedEx, whose fiscal 2011 ended on May 31, had $39.3 billion in revenue, nearly $2.4 billion in profit, about 290,000 employees and a delivery fleet of about 43,000 and 654 cargo jets. FDX delivers an average of 3.6 million shipments a day.

Edge: UPS

Biggest Challenge

When UPS� international volume spiked in the third quarter of 2010, Brown expanded capacity substantially to seize the opportunity. When global shipping volume slumped, UPS scrambled to ground planes and reduce excess capacity — particularly in Asia. That weighed on margins.

FDX�s Express unit got hammered in the quarter as frugal shippers cut back on premium delivery expenses. U.S. domestic volume alone fell 3%; combined with the global slowdown, operating income fell 19% to $288 million in the quarter.

Edge: Toss-up. UPS� fate depends on how fast Asia rebounds; FDX must find a way to recover premium U.S. domestic volumes.

Biggest Opportunity

UPS� biggest opportunity is in using its high-tech logistics systems and processes to cash in on global supply chain growth. Europe remains a key target despite the continent�s current uncertainty — the company�s $200 million expansion of its Cologne air hub will boost capacity by more than 70%. Brown could strengthen its position by acquiring Dutch delivery and logistics firm TNT Express, which has lost half its market value since May, according to The Wall Street Journal.

Strong FedEx Ground performance and rebounding fortunes in the company�s freight segment helped offset lower premium package volume, although less-than-truckload (LTL) operations remain in the doldrums. FedEx could benefit from a TNT acquisition too, but earlier this year it said TNT was �too expensive.� USPS� loss might be FedEx�s gain — its SmartPost service already transports less time-sensitive parcels to hubs, with the postal service providing local delivery.

Edge: Toss-up. The longer-term outlook is brighter for UPS� international strategy, but Europe could eat Brown�s lunch. And don�t even think about the impact of a euro collapse.

Recent Earnings

In October, UPS reported third-quarter earnings of slightly more than $1 billion on revenue of $13.2 billion. Earnings per share of $1.06 reflect a 14% increase over the same quarter in 2010. The company was able to offset soft global markets and an export slump in Asia by improving U.S. operating margins slightly to 13.1%. Brown�s full-year 2011 EPS guidance is still $4.15 to $4.40.

FedEx, which next reports earnings on Dec. 15, reported fiscal 2012 first-quarter earnings of $464 million on revenue of $10.5 billion. Earnings per share of $1.46 are 22% higher than the same quarter last year. Although FDX�s operating margin improved overall to 7% from 6.6% last year, declining package volumes caused Express segment margins to slip to 4.4%, down from 6% last year. This unit�s performance will be the thing to watch when FDX next reports earnings. FedEx revised its full-year fiscal 2012 EPS slightly lower to a range of $6.25 to $6.75.

Edge: UPS

Fundamentals

At around $68, UPS is trading about 12% above its 52-week low of $60.44 in August. With a market cap of more than $62.2 billion, the stock has a price/earnings-to-growth (PEG) ratio of 1.43, suggesting it�s overvalued. With a current P/E of 16.78, UPS� multiple is a little higher than the sector average of 13.88 but still is pretty cheap. The stock has a current dividend yield of about 3%. Its one-year return is 1.8%.

At about $79, FDX is trading nearly 24% above its 52-week low of $64.07 in October. With a market cap of about $25 billion, FDX has a PEG ratio of 0.75, indicating that the stock could be undervalued. FDX has a current P/E of 14.77 and has a current dividend yield of about 0.5%. Its one-year return is -9.2%

Edge: UPS

Holiday Bonus

UPS� My Choice provides delivery alerts and delivery time frames, rerouting and rescheduling options, visibility tools and electronic signature release. Basic MyChoice is free, but UPS also offers premium services for a subscription fee.

FedEx has SmartPost; a residential shipping service designed for online and catalog retailers. With SmartPost, FedEx delivers to its transport hubs and the postal service manages local delivery.

Edge: UPS

Winner: UPS

Brown is bigger, it knows how to manage costs aggressively, and its logistics and supply chain management expertise will become increasingly valuable for business-to-business shippers internationally. UPS� 3% dividend doesn�t hurt, either. The company�s huge investment in the Cologne air hub might weigh substantially on margins if Europe doesn�t pull out of its tailspin. But once the continent gets off the schneid, Brown�s international business will stronger — particularly if it can pick up TNT Express� assets for a song. While FedEx is well positioned to gain from the Postal Service�s woes, it needs to stem losses in its higher-margin, premium delivery business in the U.S.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned stocks.