The ongoing coronavirus pandemic has put a strain on global supply chains. What does this mean for delivery companies?
Leading delivery companies UPS (NYSE: UPS) and FedEx (NYSE: FDX) are helping to transport vital supplies to people and places in need. While certain areas of their businesses are suffering, many investors will be wondering if the ongoing uncertainty could present a potential buying opportunity.
Impact of the Coronavirus
The coronavirus pandemic has sent shock waves through countless industries, with the decline in consumer demand putting a dampener on the likes of transport businesses.
The air cargo sector in particular is being affected (1.4% drop in demand in February) as airlines have grounded the majority of their fleets. Both UPS and FedEx had to suspend their money-back guarantees and signature requirements as delays and disruptions are expected for the foreseeable future.
UPS: Bull vs Bear
E-commerce continues to take more business away from retail, which is a good thing for UPS’ market-leading ground and express delivery services. With retailers forced to close due to the pandemic, more shoppers are going online. This is an area where UPS has been investing in, with capital expenditure reaching $6.38 billion last year.
UPS also holds a competitive advantage due to its massive delivery and air fleet, which is the envy of its competitors. In 2019, UPS delivered about 5.5 billion packages, showcasing the enormity of its operations. Its margins are also very strong (6% net margin in 2019 vs 1.8% net margin for FedEx) because it is able to utilize the same networks for ground and express shipments.
Naturally, continuing disruption affecting supply chains will be an issue. In the case of a global recession kicking in and consumer spending dropping, there will be downside risk for UPS. There is also competition on the horizon from the likes of Amazon (NASDAQ: AMZN) which are looking to quickly build upon its logistics networks. Currently, Amazon is UPS’ biggest customer and this could change in the coming years.
FedEx: Bull vs Bear
FedEx also has a very strong network that will perform well long into the future. Naturally, it will also be affected by an economic slowdown, but the ongoing shift over to e-commerce is a positive.
It has similar competitive advantages to UPS in terms of its massive air and delivery fleet, sorting centers and overall worldwide operations. While UPS is more established in the U.S. ground market, FedEx is a speedier solution and it is also closing the gap on UPS in terms of this market share (13% market share vs 27% for UPS). More than half of the company revenues come through its FedEx express segment.
Like UPS, FedEx will also be dealing with Amazon making major moves in the logistics space. Shipping rates from Amazon are set to be 10% lower than those seen with UPS and FedEx on average.
FedEx has also been investing heavily in infrastructure in recent years which has led to strains on cash flow. This is a reason why FedEx is now taking significant cost action to try to maintain liquidity and cash flow. It is fully drawing down $1.5 billion in credit and has the ability to draw down a further $2 billion if needed. If strains on the business continue, it may get involved in government programs. This would see it losing equity and suspending all share repurchasing and dividends.
Which stock is a better buy right now?
For a long time, FedEx was consistently outperforming UPS stock. However, the past couple of years have seen a u-turn, with FedEx’s dropping earnings and cash flow being a concern for investors.
UPS is a company that has been around since 1907, coming through many bleak economic times. It is a company that will stand the test of time long into the future. However, with Amazon set to become a major competitor in the e-commerce delivery space, the expected return on both UPS and FedEx investments do not look too enticing.
Their hold on the same-day delivery market looks like it will start slipping in the coming years. With ongoing uncertainty and liquidity concerns also, there does not seem to be much upside to invest at current prices.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.