Ship It

FedEx and United Parcel Service have a near duopoly in the U.S. overnight package-delivery business, and similar annual revenues: FedEx is expected to have $93 billion in sales this year, while UPS should have $102 billion.

But FedEx has a market value of less than $54 billion, while UPS is worth more than $164 billion. What gives? 

Andrew Bary took a look under the hood at FedEx in the latest issue of Barron's. He came away bullish on the stock, seeing plenty of potential for improvement in operations and profit margins that can help close some of the gap with UPS.

Andrew wrote:

FedEx’s stock amounts to an inexpensive bet on higher margins, better earnings, and greater free cash flow. Its shares, at around $207, have changed little since mid-2017, badly trailing the S&P 500 index. The stock looks appealing, valued at 10 times projected earnings of $20.45 a share in its fiscal year ending in May and nine times estimated earnings of $22.61 a share in the next fiscal year ending in May 2023.

UPS, at $189, fetches 15 times estimated earnings in calendar 2022 and trades at an unusually wide premium to FedEx. The recent weakness in both FedEx and UPS shares reflect concerns about the economy and consumer spending later this year.

FedEx's Chief Operating Officer, Raj Subramaniam, is set to take the reins at the company on June 1 from its 77-year-old founder and chief executive Fred Smith. He could refocus the company on winning higher-margin and more profitable sales, taking a page from UPS' CEO Carol Tomé, who sums up her winning strategy as wanting to be “better not bigger.” 

Andrew says that an upcoming catalyst for the shares may be FedEx’s investor day in late June. Subramaniam and management should lay out their plans to boost profit margins and earnings then.

There's a big gap to close: FedEx's operating margin has been close to 6% lately, while UPS’ is over 12%.

Read the rest of Andrew's bullish case for FedEx stock here.