FedEx is a better bet for investors than UPS is ahead of the holiday season, according to Berenberg.
Berenberg analysts, including Joel Spungin, initiated FedEx with a Buy rating and a $300 price target while issuing a Hold rating for UPS with a $125 price target.
Spungin expects the Memphis, Tenn.-based FedEx to see solid ground division growth, improving margin and EBIT, and better cash generation. The Berenberg analyst does not believe the current valuation reflects the improving quality of the business.
"We think the combination of strong organic revenue growth (6% three-year compound annual growth rate), consensus 140 basis point EBIT margin improvement (driven by TNT synergies and air fleet upgrade) and a positive inflection in cash generation will drive a re-rating of FedEx shares over the next 12 months," Spungin wrote in a Sept. 20 research note.
FedEx on Tuesday reported weaker-than-expected earnings for the first quarter but raised full-year earnings per share outlook to a range of $17.20 to $17.80, up from the prior forecast of $17 to $17.60. The company also expects full-year revenue growth of about 9%.
Meanwhile, Spungin said he sees no short-term catalysts for re-rating UPS shares, even though the Atlanta-based company's premium valuation is "justified by its superior track record for returns on capital (ROCE) and returns of capital (dividends and buybacks)."
The analyst noted that cost pressures might be a headwind for UPS as a "generous new pay deal with the Teamsters" is currently being voted on and increasing investment and competition in the U.S. domestic segment, particularly ground, "may also weigh" on the stock.
Last week, UPS outlined its transformation plan, which focuses on four strategic imperatives: Expansion of high-growth international markets, growing business-to-business and business-to-consumer e-commerce, further penetration of the healthcare and life sciences logistics market, and enhancing services for small- and medium-sized businesses. The plan also includes more than 70 expansion projects for package facilities and the opening of seven new "super hub" automated sortation facilities that will be a 30% to 35% increase in efficiency than comparable less-automated facilities.
But the plan disappointed investors as it was relatively in-line with analysts' expectations, and the stock fell by almost 3%.
That said, UPS -- as well as FedEx -- is preparing for the peak holiday season. TheStreet first reported last week that UPS plans to bring on 100,000 workers for the season. The company officially announced the holiday hiring plan on Monday.
FedEx, on the other hand, announced last week that it plans to hire 55,000 temporary employees and will increase hours for some existing employees to meet the anticipated demand. The company expects a record amount of volume this holiday season.
Shares of FedEx climbed 0.6% to $248.22 at 10:15 a.m. New York time, while UPS shares rose 0.3% to $119.46.