FedEx vs. UPS: Analyst's Toolkit - TheStreet

BOSTON (

TheStreet

) -- Along with Black Friday and Cyber Monday, Brown Monday is finding its way into the vernacular.

While Black Friday is supposedly the day retailers become profitable and Cyber Monday is when online retailers see Web traffic spike for the holiday season, Brown Monday refers to the last day in which customers can order something online and be assured it will arrive in time for Christmas. ("Brown" refers to shipping boxes.) Brown Monday is a reminder that shippers also cash in during this time of year.

FedEx

(FDX) - Get Report

and

UPS

(UPS) - Get Report

, are benefiting from consumers' shift to online sales. Even though FedEx has aligned itself with businesses, more than 60% of the company's revenue comes from express services. UPS is more of a consumer-oriented company, with 40% of its revenue derived from domestic ground services. Employing financial metrics can help differentiate the two to determine which business and which model is a better bet before the holiday season's revenue gets tallied.

P/E Ratio

FedEx: 26.1 UPS: 26.6

In terms of valuation, both companies are dead even. (The industry's price-to-earnings ratio is 26.) Those numbers could diverge greatly once FedEx releases results Dec. 17 and the positive guidance the company announced on Tuesday is factored into projections. UPS isn't scheduled to publish earnings again until the beginning of February.

PEG Ratio

FedEx: 2.21 UPS: 3.04

Both stocks look ugly based on the price-to-earnings to growth ratio. Neither company can boast of untapped growth. Their global presence is difficult to improve upon. As a result, each is forced to try to steal market share from the other, which is why UPS's commercials target business shipping and FedEx is looking to capture consumer markets with the promotion of its ground-shipping options. Valuations should reflect slow growth, but they don't.

Sustainable Growth

FedEx: 0.6% UPS: 7.8 %

Since FedEx's dividend yields a paltry 0.5%, one would expect growth to be more rampant than at UPS, whose yield is 3.1%. Yet, due to erratic earnings, which led to a return on equity of just 0.7%, FedEx drastically underperforms UPS in sustainable growth. UPS pays out a higher percentage of its profits to shareholders, yet it manages to provide stronger growth prospects since it's more profitable based on its equity. Of course, some of this is due to a larger reliance on debt at UPS. But, still, its free cash flow provides a strong backbone from which to expand. FedEx has little free cash flow.

Interest Coverage Ratio

FedEx: 35.6 UPS: 7.33

Here, FedEx clearly outshines UPS due to its more conservative capital structure. While UPS's coverage ratio of 7.33 is strong, the comparison against FedEx's huge ratio of 35.6 is stark, highlighting the difference in risk. While UPS has used leverage much more liberally than FedEx and is, therefore, more likely to run into earnings problems if business drops off, it's unlikely for that to happen given its strong performance during the downturn. FedEx looks to be safe, but it should consider increasing its debt to help enlarge the business. Since free cash flow for FedEx is so low, this is one of the few ways that the company could generate funds to fuel growth. So FedEx's coverage ratio may indeed be too high.

Present Value of Growth Opportunities

FedEx: $29.87 (66.8%) UPS: $27.49 (52.2%)

After yesterday's positive guidance news, investors bought up FedEx on hopes of continued growth, which is reflected in the PVGO metric. That measure suggests that 66.8% of the stock price is based on growth expectations, but the financials don't support that. The economic turnaround, which many investors are hoping will accelerate in 2010, will probably be sluggish, weighing on shippers. UPS is also relatively growth-heavy.

Both stocks are fairly rich -- current prices are unattractive. If investors must choose one, UPS looks to be the favorite simply because it has managed decent profitability throughout the recession, pays a much better dividend and has a fair amount of free cash flow to support operations.

-- Reported by David MacDougall in Boston.

Prior to joining TheStreet.com Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.