If FedEx Soars, Will UPS Follow?
MEMPHIS, Tenn. (
) -- Analysts expect big things from
FedEx
(FDX) - Get Report
when it reports quarterly results on Thursday -- no surprise in a recovering economy.
But the expectation raises a couple of questions. First, if FedEx does well, what does that mean for
UPS
(UPS) - Get Report
? Additionally, FedEx's labor classification remains a wild card, with Congress expected to decide whether the two companies should be treated the same under labor law.
Regarding UPS, Barclays Capital analyst Gary Chase wrote recently that while FedEx's fourth-quarter guidance will be the focus of the earnings call, "We think the call will shift investor focus towards earnings expectations for UPS -- we believe UPS earnings for the year have substantial potential upside, but especially in 1Q where we believe company guidance was very conservative."
Essentially, the two overnight package companies are proxies for the economy, with the caveat that their business models generally enable them to make money no matter what the economy does. In the case of UPS, about 6% of the gross domestic product is in its system at any given moment. So the discrepancy between the share price growth at the two companies is something of an oddity.
|
In 2009, the
Standard & Poor's 500 Index
rose about 25%. FedEx rose about 30%. UPS rose about 4%. So far this year, the index is up 3%. FedEx is up 2%. UPS is up 7%.
One explanation is that UPS has been a bit more cautious in its projections of economic growth. In the case of FedEx, "people were looking out to the positive sooner," said Standard & Poor's analyst Jim Corridore, in an interview. "FedEx was looking out to fiscal 2011 while the UPS story was more (focused) on 2009." Corridore has a strong buy on FedEx, and a buy on UPS, which he said is "at the high end of its historic P/E range."
Meanwhile, a factor in the future of FedEx stock is that Congress is preparing to consider the Federal Aviation Administration reauthorization bill, which contains a provision that would reclassify FedEx Express drivers so that they would potentially be more easily organized by labor unions.
Congressional approval of the reclassification "would be a negative," Corridore said. But it remains unclear what the outcome will be. Two Tennessee senators have managed to remove the provision from Senate consideration, but because a House bill contains the provision, the resolution will come eventually in a reconciliation between the House and Senate versions, so that is where the real fight will be waged. FedEx CEO Fred Smith often addresses labor issues on the earnings call.
Analysts surveyed by Thomson Reuters are forecasting FedEx earnings of 72 cents for the fiscal third quarter, which ended Feb. 10, and several analysts are forecasting a beat. That more than doubles earnings of 31 cents in the same quarter a year earlier.
Corridore upgraded FedEx stock to a strong buy last month, saying an earnings beat from
Expeditors
(EXPD) - Get Report
reflected better than expected air freight volumes. More recently, Morgan Keegan analyst Art Hatfield upgraded FedEx to outperform from market perform, reflecting "the earnings potential of the company as volumes recover." Chase said that as earnings estimates are revised upwards, they are approaching his own estimate of 76 cents.
Avondale Partners analyst Don Broughton recently wrote in a report on FedEx that with lean inventories, "the economy (and supply chain) is at a point where every incremental unit of demand will result in an incremental unit of freight volume."
-- Written by Ted Reed in Charlotte, N.C.
.
