FedEx and UPS

Recently, Goldman Sachs (GS) initiated its coverage on FedEx (FDX) and UPS (UPS) with “buy” ratings. Goldman Sachs argued that the stocks are too cheap to ignore. Amazon threatened an aggressive approach to enhance its logistics capabilities. However, the firm thinks that Amazon’s threats are overblown. As a result, buying at the current levels could give a strong double-digit gain over the next year.

GS Says Buy FedEx and UPS, Ignore Amazon’s Threats

Amazon is aggressively trying to build an in-house shipping and delivery network. Within a few years of starting Amazon Logistics, the company expanded its cargo fleet to 70 planes. Amazon owns over 10,000 delivery vehicles. The company wants to gain access to ocean and rail routes.

Industry experts think that Amazon is trying to be a third-party logistics service company. Considering Amazon’s enormous financial strength, it might build a vast logistics infrastructure quickly, which could edge out players like FedEx and UPS.

Goldman Sachs analyst Jordan Alliger argued that investors should focus on FedEx and UPS’s strategies to counter the situation. Recently, FedEx didn’t renew its deal with Amazon. FedEx provided express domestic delivery for Amazon’s packages. FedEx said that the strategy would help it focus on the broader e-commerce market. According to CNBC, Alliger also pointed out that FedEx and UPS are investing in new hubs, network automation, and optimization to compete with Amazon.

Alliger stated that Amazon’s logistics capabilities are too small to compete with FedEx and UPS. The company’s limited network size wouldn’t provide global flexibility to offer timely delivery services. Alliger thinks that Amazon needs to invest $122 billion into its logistics network to catch FedEx and UPS.

Too cheap to ignore

FedEx and UPS stocks were sluggish for the last 12 months due to global economic growth slowdown concerns, uncertainty about US-China trade negotiations, and threats from Amazon’s aggressive logistics infrastructure build-outs.

FedEx has lost ~30% of its market value in the trailing 12 months. However, the stock has risen ~1% YTD (year-to-date). UPS shares fell ~4% over the last year. The stock has gained ~6% YTD. The stocks have underperformed major US indexes. The Dow Jones, the NASDAQ, and the S&P 500 indexes have risen 16.1%, 24.7%, and 19.7%, respectively, YTD.

The two stocks’ YTD returns lagged the iShares Transportation Average ETF (IYT). IYT has invested 17% of its fund in the air freight and logistics industry. So far, IYT has gained 13.3% this year.

Alliger sees the lackluster YTD performance as a buying opportunity for higher returns. He provided a target price of $200 on FedEx, which represents an upside potential of 23% over the next year from the closing price of $162.60 on Thursday. FedEx is Alliger’s favorite stock pick. He thinks that UPS stock could gain 19% to $123 over the next 12 months.

Currently, the two stocks are trading at a discounted valuation multiple compared to peers and the industry average. FedEx and UPS have one-year forward PE ratios of 11x and 13.8x, respectively. The industry average PE ratio is 15.9x. Expeditors International of Washington and Forward Air have PE ratios of 20.7x and 17.9x, respectively.

Analysts’ recommendations

FedEx received a consensus “buy” rating, while UPS received a consensus “hold” rating. About 68% of the 29 analysts covering FedEx recommended a “buy,” ~25% recommended a “hold,” and 7% recommended a “sell.” The average target price of $187.84 on the stock suggests upside potential of ~13% over the next year.

For UPS, ~37% of the 27 analysts recommended a “buy,” ~56% recommended a “hold,” and 17% recommended a “sell.” The average target price of $114.68 suggests a return potential of ~11% over the next 12 months.

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