At first glance, United Parcel Service Inc. and FedEx Corp. seem alike. The two shipping giants compete for some of the same customers, and their operations are sensitive to trends in the world economy, such as rising oil prices.
But investors are rewarding FedEx for continuing to post healthy profits and to enforce strong cost controls. UPS, which has tightened its business, generates more revenue and has higher operating margins and return on invested capital than FedEx. Consequently, margins and return on capital at UPS haven't changed much, while FedEx's have steadily improved.
"FedEx, along with other best-in-class transports, has been able to offset higher operating costs with strong pricing growth and strict cost controls in other areas of their businesses," BB&T Capital Markets analyst John Barnes said in a recent research note.
Operating margins and return on invested capital are measures of a company's profitability, essentially gauging how well a company is running its businesses and using its money invested in its operations.
Since November 1999, when UPS went public, FedEx's share price has more than doubled, to more than USD 101 a share. After a 36 percent run-up on their first day of trading, UPS shares are trading less than USD3 higher. In the past 12 months, UPS stock has traded between USD65.50 and USD83.99. FedEx had a 52-week low of USD76.81 and a high of USD120.01.
Analysts' ratings are virtually identical, with UPS having nine "buys," eight "holds" and one "sell," and FedEx having nine "buys" and nine "holds."
Both stocks fell on July 25 when UPS reported earnings that came in below Wall Street's expectations because of higher costs and offered tepid third-quarter and full-year outlooks. UPS also said it expects the economy to moderate in the second half of the year compared with the first half.
The result was a 15.9 percent decline in the UPS share price at one point during the day and 10 percent at the market's close, its largest one-day percentage drop since going public. FedEx's stock closed that day down USD1.13, or 1 percent, at USD109.31. FedEx earlier in July had reiterated its upbeat outlook for its fiscal year that began June 1.
"We understand that there was some disappointment about our guidance going forward, but the market is going to do what the market is going to do," UPS spokesman Norman Black said. "We really do manage this company for the long term."
FedEx declined to comment on its stock price.
UPS had an operating margin of 14.4 percent in its second quarter, which ended June 30, compared with 15.2 percent in the year-earlier period and 14.7 percent when it went public, A.G. Edwards analyst Donald Broughton said.
Its second-quarter operating margin was hurt by higher costs. Operating expenses rose 16.2 percent, to USD10.04 billion, with compensation and benefits costs rising 11.2 percent, to USD5.99 billion, and fuel costs increasing 44 percent, to USD668 million.
Second-quarter earnings at Atlanta-based UPS were USD1.06 billion, or 97 cents a share, up from USD986 million, or 88 cents a share, in the year-earlier period. Sales rose 15.2 percent, to USD11.74 billion.
UPS carefully manages its cost structure and expenses by using technology to its advantage, Black said. That and other cost-control factors help it remain competitive, even as UPS pays union wages to employees who belong to the International Brotherhood of Teamsters, he said.
FedEx's operating margin was 10.9 percent in its fourth quarter, which ended May 31, compared with 9.6 percent in the year-earlier period and 6.7 percent when its rival went public, Broughton said.
The Memphis-based company's operating expenses increased 8.5 percent, to USD7.57 billion. Salaries and benefits costs increased 5.8 percent, to USD3.27 billion, and fuel expenses rose 28.4 percent, to USD863 million.
FedEx's fourth-quarter earnings rose 26.8 percent, to USD568 million, or USD1.82 a share, from USD448 million, or USD1.46 a share, a year earlier. Sales increased 10.1 percent, to USD8.49 billion.
A look at return on invested capital shows a similar trend to operating margins. Morgan Keegan analyst Art Hatfield expects return on capital at UPS to be 21.5 percent this year, compared with 15.2 percent in 2002. But he estimates that FedEx's return will be 9 percent this year, more than double the 4.3 percent in 2002.
It's unclear when UPS will be able to overcome the cost headwinds, BB&T Capital analyst Barnes said. During its second-quarter conference call in July, the company didn't leave the impression that it is addressing rising operating costs head-on, he said.
That's different from when UPS preannounced an earnings warning in the fourth quarter of 2004 and quickly said that it would cut costs by USD200 million, Barnes added.
Although Barnes likes UPS for the long term, he doesn't see a catalyst for the stock in the near term. The company's cautious guidance and economic outlook are also worrisome, but Barnes said they should be viewed as UPS-specific at this point.