UPS versus FedEx -- Which Stock? (FDX, UPS)

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Includes: FDX, UPS
by: Ashish Kelkar

Two companies are riding, and will continue to ride, the wave of globalization and e-commerce: Atlanta-based United Parcel Service, Inc. (NYSE : UPS) and Memphis-based FedEx (NYSE : FDX). Fierce competitors, these two firms have epitomized efficiency. But given a choice between the two stocks, which wins? Here is the result of both fundamental and relative analysis:

On a strict fundamental valuation basis (using ValueLine and S&P reports), FDX looks richer by about 15%. However, I am inclined to believe that the growth rates these two esteemed publications have put out are low. Anybody who has used the Po = FCFE / (r-g) model or its variants knows that a small tweaking of the growth rate can do wonders to your results.

Based on a 13% growth rate, the fair market valuation comes out to $133 for FDX. It also looks undervalued on a P/S and EV/EBITDA basis.

Having said that, FDX has had a remarkable run in the few months (look at the 200 day moving average) and UPS is still a great company, especially with that 2% dividend. It's just that I think Fedex has more juice in it.

• FDX has a small edge on UPS in China (2 extra routes)
• FDX is recognized as a premium brand, may give it more pricing power
• FDX is a smaller company ($32B) versus UPS' $84B - more nimble and a faster growth story.

FDX also may be a great bargain today for a private equity firm. 2006 may be the year when the largest buyout -- in 1988 of RJR Nabisco for $31.4B -- may finally be topped. Why not Fedex? It's an ideal candidate with a cash flow rich, unglamorous and capital intensive business. For the more conservative types, there's always UPS.

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