Can United Parcel Service Inc. (UPS) and FedEx Corporation (FDX) Deliver E-Tail Profits?

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E-commerce is a megatrend in full swing, and investors interested in the retail sector should be exploring ways to capitalize on it.

E-commerce sales were up by 15% in 2012, a year with overall U.S. GDP growth of 2.2%. In fact, year-over-year growth in online commerce has been in the double digits in each quarter since mid-2010, according to comScore. And that trend looks to be accelerating out of the recession.

FedEx Corporation (NYSE:FDX)This is the second in a series of posts that takes a look at opportunities in the growing e-tail trend. Last week, I took a look at Amazon.com, Inc. (NASDAQ:AMZN), the fast-growing e-tail juggernaut. Amazon looks poised for domination across the e-tail landscape, gobbling up market share with every passing quarter. But it’s far from a slam dunk, with increasing costs and a major buildout of warehouses cutting into profits and establishing some ongoing expenses that could create margin pressure for years to come.

Amazon also carries serious risk, as its stock price is untethered to its financial underpinnings. Amazon carries great potential, but investors must have an appetite for risk.

So, where else are investors to look for e-tail profits? Well, every purchase a customer makes at Amazon or another e-tailer must be delivered. And there are really just two publicly traded names in that game: United Parcel Service, Inc. (NYSE:UPS) and FedEx Corporation (NYSE:FDX).

Either one of these companies is worth consideration. But there is no clear winner between the two, and each faces its own set of headwinds moving into the future.

Sizing up Big Brown

UPS is the established leader in business-to-consumer shipping. Its iconic brown box trucks and uniformed drivers delivered more than 500 million packages during the holiday season. The company has a long history of solid management, as it continues to seek ways to improve its efficiency and expand margins.

You’ll see a sky-high price-to-earnings multiple for UPS. But that’s attributable to a major pension obligation of about $3 billion that the company had to meet last quarter. Excluding that charge, UPS earned $1.32 per share in the quarter, up over last year’s $.74. The company also saw revenue growth of near 3% year-over-year.

UPS expects earnings growth of 6% to 12% in 2013, with EPS estimates of $4.80 to $5.06 per share. That would put its forward PE for 2013 somewhere between 16.5 and 17.4. Not bargain-rack prices, but certainly not expensive, given the company’s track record. What’s more, UPS says its fleet of aircraft and trucks is the newest in the industry, which means it plans for lower capital expenditures in the coming years than its competitors do.

UPS also delivers a nice dividend of a hair under 3%. Perhaps more importantly, it has a great history of raising that dividend. It’s up 161% since 2003. The only year UPS did not increase its dividend over that time was at the height of the economic crisis in 2008-2009.

But UPS is not without its worries. The company faces stiff competition from FedEx, which claims it has been taking market share from Big Brown. UPS is also a union shop, and there are concerns about contract negotiations with the Teamsters. (UPS says the two sides are “engaged in productive discussions.”) And there remain concerns about that pension, and what future obligations will do to the company’s bottom line.

A leaner, meaner FedEx?

As noted above, FedEx claims it has been taking market share from its larger rival. It says its holiday shipment volumes were up 13% over last year. Income from its ground shipments last quarter was up 4%, something it attributed to “strong revenue growth from e-commerce and market share gains.”

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