It seems unbelievable that there can still be room to move more into a digital society, but as ubiquitous as Internet shopping is there is still a lot of room to grow. Everybody uses Amazon.com, Inc. (NASDAQ:AMZN) for everything, and yet there are still a lot of brick-and-mortar stores making a profit, if only just barely. Physical goods are still going to be present in our society even if physical media is on the decline.
Leveraged and highly valued
United Parcel Service, Inc. (NYSE:UPS) delivers the vast majority of the packages that I receive. It also struck me as a forward-thinking company when I would see their delivery vehicles that are powered by natural gas. The company seems to have a very high valuation as well. This is explainable, of course. From the beginning of 2013 to the present, the share price has gone from $73 to almost $89, but the company’s price-to-earnings ratio has gone from around 21 to 101 in the same period. The reason for this is that the company had a large non-cash charge in the last quarter of 2012 that threw off the trend for earnings.
The company’s earnings-per-share took a severe hit with one quarter negating the other three quarters in the calculation. The first quarter of 2013 had earnings bounce back to a profit in line with United Parcel Service, Inc. (NYSE:UPS)’s normal quarterly results. All that this means is that UPS’s valuation is skewed by an outlier. Perception matters, however, and until the higher PE ratio can be worked out of the numbers it will keep interest off of the company since any screens based on PE might neglect UPS.
Of greater concern is the debt-to-equity ratio that is currently over 3. This number is not as shocking after some thought as it is at first glance, however. Considering the amount of hard assets that the company has, it is not going to face a debt crisis unless all of its debt is due at the same time. It is still a significant amount of leverage, however, and that is one of my buttons. Both personally and in investments, I hate debt. The company is also right up against its 52-week range, but I think its earnings will only improve as the economy moves forward. Imagine the potential when Europe returns to growth.
United Parcel Service, Inc. (NYSE:UPS) has decided to add natural gas trucks to its fleet. These are not the delivery cubes, but the big trailers that do the long-haul portion of the journey. It is adding 700 liquefied natural gas trailers by the end of 2014, a move that will come at a substantial cost but which could potentially reduce the company’s overall operating expenses. It has $7 billion in cash on the balance sheet, but over $12 billion in long-term debt. When you invest, if you do, just remember that the company is very profitable with excellent cash flow and that the recent numbers are skewed by a one-time non-cash charge.
Leverage in perspective
FedEx Corporation (NYSE:FDX) has a debt-to-equity ratio of 0.1392, which is a lot better than United Parcel Service, Inc. (NYSE:UPS)’s. Over the course of three years, FedEx has made a move that was less than half of UPS’s, 16.5% vs. 35% respectively. FedEx has almost $44 billion in revenue but generally makes less of a profit on its revenue. Its net margins also tend to be lower than UPS’s. FedEx has around 2-3% for net margins, versus UPS’s 7%.
United Parcel Service, Inc. (NYSE:UPS) seems to run the better operation, but the companies are not directly comparable. FedEx Corporation (NYSE:FDX)’s main business is delivering packages, usually smaller ones, in a short time and on time. UPS is more focused on general shipping, and FedEx’s answer is FedEx ground which is about 20% of the business. Delivering packages on a tight schedule is a far more demanding business, and the company probably has to swallow the higher costs in order to remain competitive in pricing. FedEx is attempting to boost profitability, but the benefit supposedly won’t be seen until around 2015 or 2016. Given the under-performance of the company’s shares compared to UPS, FedEx probably makes a better buy for when additional profits arrive.
A constant favorite of mine is Seaspan Corporation (NYSE:SSW), a company which owns, leases, and manages large container cargo ships. If I end up not liking either United Parcel Service, Inc. (NYSE:UPS) or FedEx Corporation (NYSE:FDX), I will still like Seaspan. UPS and FedEx get goods to your doorstep, but shipping massive quantities of goods from overseas requires ships. Planes are simply not efficient if you compare the cost on a per-pound basis.
Seaspan is a fantastic dividend stock that is offering over 5%, and also has a history of increasing its dividend. The company is profitable with net margins of 33%, which means that it has a cushion to absorb problems that might arise on occasion. The company is expanding its fleet so its current debt is high, but this is a standard state for the company. The debt would be secured by the ships, minimizing the company’s risk. Seaspan is growing its revenue by expanding its fleet, but with a solid dividend you are not looking for explosive growth. Instead, there will be just enough to keep the dividend consistent and increase it over time.
Both FedEx Corporation (NYSE:FDX) and United Parcel Service, Inc. (NYSE:UPS) are making serious efforts to reduce expenses to try and eventually increase profits, even if those efforts mean making a lot of capital expenditures. That is an obvious statement, but the point is the timing: pain now for benefit later. UPS’s debt scares me, especially considering its large-scale initiative to make a portion of its fleet run on natural gas.