In this series of articles, I will analyze and evaluate major companies in various industry segments to determine the best company in terms of operations and valuation. In this introductory article, I have selected the Air Freights & Logistics industry. This industry is a good indicator of the overall health of the economy as industrial production is one of the major factors that controls its growth.
The four companies selected for analysis are:
1) FedEx (NYSE:FDX)
2) UPS (NYSE:UPS)
3) Expeditors International of Washington (NASDAQ:EXPD)
4) C.H. Robinson Worldwide (NASDAQ:CHRW)
Some basic information about the companies is presented in the table that follows:
UPS is by far the largest company on the list, with a market capitalization greater than the combined market capitalization of the other three companies. The company also has the highest debt to equity ratio (a big negative) and pays the biggest dividend (percentage wise). The stocks of the 4 companies have lagged the market during the last 1 year, with EXPD posting the biggest decline of 19%.
Next, I looked at the historical growth rates of revenue, income and book value, and the projected long term earnings growth rates. These are summarized in the table shown below:
All the 4 firms have increased their growth rates over the last 1 year compared to their respective 5 year averages. This indicates improving fundamentals and economic recovery. While CHRW has done a great job of consistently increasing its revenues, the EPS growth rate is decelerating.
Overall, I would give EXPD the advantage when it comes to the historical growth rates. However, when it comes to future growth rates of income, the 4 companies are projected to grow at a very similar long term rate of 13% to 15%. No firm has a decisive advantage.
After checking the historical and projected future growth rates, I evaluated the gross and operating margins of the 4 companies selected for analysis. The table that follows presents the evaluation results.
FDX's gross margins have declined over the last 10 years. It has, however, maintained its operating margins during this time period. UPS and EXPD have both expanded gross and operating margins over the last 10 year and 5 year periods. CHRW has been the model of consistency with very minor changes in its margins over the analyzed time frame.
Coming to other operational aspects of the firm, I paid close attention to the return on invested capital, and the capital expenditure (as percentage of sales) that the firms were employing to fund their growth.
CHRW provides the highest ROIC and its business model requires minimal capital expenditure. EXPD has also consistently provided a respectable ROIC, with very low levels of capex needs. FDX has the highest investment requirement. The company is currently in the process of investing in more efficient Boeing 757, 767 and 777 aircraft. UPS outperforms its closest rival FDX in terms of both ROIC and capex needs.
Now that we have developed a good idea about the fundamentals of the companies selected for analysis, the next step is to perform relative valuation. The multiples used in the analysis were based on historical analysis of individual company and industry multiples.
The table below presents the valuation analysis results.
As shown in the table above, FDX is significantly undervalued at current levels while CHRW trades at a modest discount. UPS and EXPD are overvalued at current levels and should be avoided.
Based on a combination of company fundamentals and valuation analysis, CHRW is my preferred vehicle to gain access to the Air Freight & Logistics industry. However, I would wait for a pullback before opening a position in CHRW. Although FDX is undervalued and might make a good investment at current levels, I would prefer holding UPS over the long term.
As always, please do not consider this list as a "buy" list, rather use this list as a starting point for your research.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.