After a blockbuster Black Friday weekend and a year’s worth of strong gains, what’s next for parcel delivery companies UPS (UPS Stock Quote, Chart, News NYSE:UPS) and FedEx (FedEx Stock Quote, Chart, News NYSE:FDX)? Likely more of the same, says David Burrows, chief investment strategist at Barometer Capital Management.
But if you had to pick between the two going forward, Burrows says UPS is the better bet.
“This is a theme that we’ve been focused on all year long [with] logistics companies,” said Burrows, speaking on BNN Bloomberg on Thursday. “If you believe we’re headed into a new economic cycle, transports are a great place to be focused.”
“We’ve talked about rails and we’ve talked about these logistics companies and the software companies that sell into this space, and all of them are attractive. UPS and FedEx are the most obvious beneficiaries of the move to online shopping and the logistics of moving things from A to B. So they’ve both been huge beneficiaries,” Burrows said.
A clear sign that business is booming came this week with UPS announcing shipping limits to be placed on some of the larger retailers over the holiday season due to peak volumes.
“Both stocks can certainly pull back. However, if you had to choose between the two —and they’re both good companies— I would prefer UPS…”
“UPS (UPS) continues to work closely with our largest customers to steer volume to capacity and ensure the UPS network is reliable for all customers,” read a statement as reported by CNN on Wednesday.
The apparent aim has been to give small and medium-sized businesses a chance to get orders filled as online sales continue to accelerate in the wake of the COVID-19 pandemic and a rush to e-commerce on all sides.
Amazon reported record sales over the Black Friday/Cyber Monday weekend, while Thanksgiving Day sales in the US spiked by 22 per cent to $5.1 billion, according to Adobe Analytics, and Black Friday sales reached $9 billion, also up 22 per cent.
In the case of UPS and FedEx, both stocks were having trouble gaining ground in recent years but 2020 has been spectacular. Fedex is now up 93 per cent for the year while UPS is up 43 per cent. From a Canadian perspective, domestic and international overnight shipping company Cargojet (Cargojet Stock Quote, Chart, News TSX:CJT) has seen its share price double this year.
For its part, UPS Canada opened up its largest package sorting and delivery hub last month in Caledon, Ontario, as part of an $800-million investment by the company in Canada, first announced in 2018. The company said it will hire over 5,000 new employees for the holiday season.
Burrows says investors may want to go with UPS over FedEx, as it looks like the more solid business from an operational perspective.
“Both stocks can certainly pull back. However, if you had to choose between the two —and they’re both good companies— I would prefer UPS,” Burrows said. “Their business model is more unified whereas FedEx was cobbled together with a number of acquisitions. Many of their systems don’t appear to talk to one another particularly well so they’ve had operational issues over time.”
“UPS, I believe, has a stronger operating base, and for that reason I would choose UPS,” he said.
UPS saw strong top and bottom line gains in its latest quarterly earnings, delivered in late October, where the company’s third quarter consolidated revenue grew by 16 per cent year-over-year to $21.2 billion and adjusted EPS grew by ten per cent to $2.28 per share. Analysts had been expecting $1.90 per share. UPS reported an average daily volume increase of 13.5 per cent from a year earlier, while the company declined to provide guidance going forward, citing the ongoing economic uncertainty.
“Our performance highlights the agility of our global integrated network amid the ongoing challenges of the pandemic. Our results were fuelled by continued strong outbound demand from Asia and growth from small and medium-sized businesses,” said CEO Carol Tomé in a press release on October 28. “UPSers are everyday heroes who are keeping the world’s supply chains moving. I want to thank our team for their ongoing commitment to our customers and the communities we serve.”
The view on UPS stock after this year’s gains seems to be a mixed bag. The stock currently has 11 Buy ratings, one Hold and three Sells, according to Tipranks. UPS received a reiterated “Buy” rating from Sanford C. Bernstein in a report to clients on Wednesday, with a price target of $184.00, which translated to a projected return of 9.8 per cent as of publication date.
Meanwhile, Mark Tepper of Strategic Wealth Partners told CNBC’s Trading Nation on Wednesday that UPS is the better bet over FedEx at the moment, saying that UPS has more exposure to the customer, which is key during the current stay-at-home environment.
“FedEx, in my opinion, [has] a long history of kind of overpromising and underdelivering,” Tepper said. “They were actually on the ropes pre-Covid. UPS, in my opinion, just flat-out executes better.”