Author: Tyler Kocon, Split Rock Private Trading
Covestor model: Equity Rotation
Disclosure: Long FDX
While traditional retailers will still capture the lions’ share of consumer attention, the growing internet market and smartphone revolution will drive demand for e-commerce like never before.
Big time players in the online shopping realm like Amazon (AMZN) and eBay (EBAY) have seen revenues increase steadily since 2008. eBay’s revenues have risen from $8.54 billion to $9.156 billion since 2008, which translates to an increase of 7.2%. Similarly, Amazon’s have risen from $19.166 billion to $34.204 billion in the same timeframe, an increase of a whopping 78% (as of 1/25/12 according to Yahoo! Finance).
While investing in retail-oriented companies is an acceptable strategy, traditional investors might need to take a look outside of the box to find potential gains. Online retailers like Amazon do not maintain brick-and-mortar storefronts. Instead, they rely on a vast and integrated system of logistics to transport their goods to their customers. Instead of making a play on the actual retailers, why not turn to the companies that provide the backbone for their business?
Among large-scale shippers, the most popular organizations are the United States Postal Service, United Parcel Service (NYSE:UPS), and Federal Express (NYSE:FDX). UPS and FedEx provide for over half of American shipping services, with the major player in the industry still the United States Postal Service. However, the recently well–documented struggles of the USPS have once again pushed private shipping companies into the foreground.
While FedEx and UPS continue to gain market share, a closer look into the activity of their stock depicts further results. Both companies offer a dividend, but the offering from UPS is substantially higher at 2.80% yield than the 0.60% offered by FedEx (as of 1/25/11).
Comparably, both companies offer a comfortable current ratio at 1.70 for UPS and 1.52 for FedEx. The coverage ratio is a measure of a company’s feasibility to honor their current (or short term) commitments. These ratios indicate that both companies control a reasonable amount of assets to cover their liabilities. The relatively small spread between the two companies indicates that they are engaged in similar situations with regard to their financial position. With two companies so closely related in service and overall market position, how does an investor decide which company to invest in?
Well, in this case, it may well come down to which company is positioning for a more successful future. UPS may have a considerable advantage in overall market share, but the lack of a larger dividend may suggest that FedEx is looking to reinvest capital in itself, allowing for a more substantial attack on UPS’s business.
Over the long run, the amount of debt that UPS has accumulated may worry some long-term investors. But in this case, it is hard to argue against the substantial market capitalization advantage that UPS holds. UPS maintains nearly 2.5 times the market cap of FedEx, with UPS reporting $72.97 billion in market cap compared to FedEx, which reports $29.12 billion (as of 1/25/12 according to Google Finance).
In the long run, FedEx has less debt and more to gain from economic success. UPS has penetrated the market and room for them to grow is getting smaller by the day. As a pure growth play, investors will look towards FedEx. However, if an investor is looking for a more stable ride from holding a long position, they may see steadier returns if they choose to line their pockets with brown and its attractive 2.80% yield.
