On Wall Street, UPS lags archrival profit margins, pilot talks cited
UPS officials take a decidedly disinterested public stance toward the price of their company's stock.
Chief Executive Mike Eskew says he checks the price occasionally but views Wall Street's ups and downs as a distraction from his job of managing the Sandy Springs delivery giant "for the next quarter-century, not the next quarter."
But it's hard not to notice that archrival FedEx has outperformed UPS on the New York Stock Exchange for five of the last six calendar years.
UPS issued its first public stock in late 1999 at $50. Shares shot to almost $76 in the first two days of trading, then settled in the high $60s. Since then, UPS shares have had three losing years and three gainers. They closed last week at $76.25.
FedEx has been a steadier growth stock, posting annual gains in all but one year since 2000. During that time, shares have climbed from about $40 a share to over $100, closing Friday at $105.05.
In the past six months, FedEx shares climbed almost 25 percent while UPS rose 5.4 percent.
Art Hatfield, transportation analyst at Morgan Keegan & Co. in Memphis who has "market perform" ratings on both UPS and FedEx stock, said investors lately are concerned about UPS' ability to expand profit margins as well as stalled pilot contract talks.
"There is concern about UPS' ability to improve profit margins," he said. "Going forward, the expectation is that margins will be pretty much flat. Their pilot situation is also hanging over the stock due to concerns about possible labor problems."
UPS profit margins were 15.8 percent domestically in the fourth quarter and 19.4 percent overseas. That's well ahead of FedEx's 9.8 percent profit margin in its most recent quarter.
UPS revenue rose just 2.7 percent per package domestically in the fourth quarter, and international revenue fell 5.1 percent on a per-package basis, an indication that UPS may be cutting prices on some of its most profitable products. FedEx doesn't release exactly the same statistics, but the company appears to be holding firm on prices and raised its revenue per package about 8 percent in its most recent quarter.
Despite more than three years of contract talks, UPS pilot negotiations are in the deep freeze after the National Mediation Board declared an indefinite recess. Pilot labor talks are stalled at FedEx, too, although the company has been negotiating with its fliers for about one year less than UPS.
Rick Paterson of UBS Investment Research said in a research report that UPS has moved to cut prices for ground packages to counter FedEx, which has made deep inroads into UPS territory and now controls 16 percent of the market. UPS also faces stiff competition in Asia, where FedEx has a larger air network.
Teresa Finley, head of investor relations at UPS, said investors should take a long view of UPS and judge its performance broadly.
"We've outperformed all the major indices for the last five years," she said. "We have a strong outlook and a great global opportunity."
At the same time, Finley echoes Eskew and other top UPS executives who say they are unconcerned about stock price fluctuations.
"We're very focused on our operational performance," she said. "The stock price will work itself out."
Since going public with what was then the world's largest initial stock offering, UPS has traded at a premium to the rest of the transportation sector.
The company's unrivaled balance sheet and dominant position in domestic ground shipments made it the blue chip among its peers.
That's still the case: UPS stock trades at about 21 times annual earnings, FedEx at 19.6 times earnings. The UPS price/earnings ratio is also higher than Atlanta's other large, publicly traded firms.
UPS had $3.5 billion in free cash flow last year and has used some of that money to buy back its shares on the open market — a move meant as a vote of confidence in the company's future. UPS also has raised its dividend 74 percent in the last three years to 38 cents a share, compared with 8 cents a share at FedEx.
FedEx officials declined to discuss the company's stock outlook, in keeping with what they said was a long-standing policy of avoiding the topic.
A current survey of transportation analysts shows positive outlooks for both UPS and FedEx. A dozen analysts rate FedEx a "buy" and eight call it a "hold." Eleven analysts rate UPS a "buy" and eight say "hold." None suggest selling either stock.
Jeffrey L. Pittsburg, founder of Pittsburg Research, said UPS uses dividends to provide steady returns for long-term and institutional investors, which make up the bulk of its stock holders.
"UPS is smart to consistently increase its dividend to preserve its stock valuation," Pittsburg said. "UPS stock already trades at a premium. It can't increase earnings more than it already has. The best way for UPS to protect the value of its stock is by raising the dividend."
Pittsburg said FedEx "has been a hell of a buy" in recent years, and he expects the Memphis-based firm to continue challenging UPS on the ground and overseas.
But he warns FedEx stock could hit a barrier when its price/earnings ratio reaches that of UPS.
"Once they reach parity," Pittsburg said, "either UPS is going to go up or FedEx is going to stall. I can't see FedEx maintaining the same [price/earnings] multiple as UPS."
