Hands down, the biggest story in retail in recent years has been the rise of e-commerce. This major disruptive force has changed the way that businesses operate, as well as influencing consumer preferences.
As consumers find it more convenient to shop online, rather than getting in the car and driving to the mall, traditional retailers have watched their revenues plunge.
Yet investors who got in early on e-commerce have done well, and such companies as Amazon, Alibaba Group and Baidu continue to thrive. But intelligent investors can also benefit from purchasing shares of major package delivery services, most of all, FedEx (FDX) and United Parcel Service (UPS) . Their growth is intertwined with e-commerce sites.
First-quarter numbers for FedEx reflect how the company is running evenly with explosive e-commerce momentum. Fedex shares are up about 22% this year.
As e-commerce has grown in significance and capacity during the past few years, consumers have started ordering larger items over the internet, including big household appliances and pieces of furniture. This means that FedEx has had to re-engineer its ground delivery capabilities from delivering mostly smaller parcels. By smartly hiking surcharges for bulky shipments and by testing new equipment and facilities better suited to handle big items from e-commerce, FedEx has managed to address this altering landscape.
These capabilities are particularly important as the holiday season approaches.
Sales from e-commerce are projected to rise 11% this year, to $91.6 billion. Experts suggest that FedEx could expect roughly 10% growth in holiday season shipping volumes. That figure could go even higher - industry tracker ShipMatrix has penciled in a 14% increase for FedEx.
FedEx is positioned for nearly 11% annual earnings per share (EPS) growth for the next five years, over 270 basis points faster than the S&P 500 during this period.
United Parcel Service, which has grown its business despite navigating challenges to its margins. This stress on its margins is largely due to expanding e-commerce growth.
Yet UPS's less expensive ground deliveries and overnight box volumes have trended upward
With its massive scale, UPS is well positioned to increase its pricing. This would help address the margin-cutting effects of the strong e-commerce demand.
UPS's biggest advantage is in the evolving business-to-consumer (B2C) market. B2C accounts for 45% of UPS's current business.
Over the long term, UPS is expected to clock a 9%-plus EPS run-rate.
Besides these earnings figures, UPS, which is up about 18% this year, remains a good pick for passive income investors. The stock offers a nearly 2.8% dividend yield, backed by a comfortable payout ratio and six years of dividend growth.
UPS is one of the most leveraged plays in the U.S. e-commerce space, with a solid track record for making investments and consolidating service capabilities.
Both UPS and FedEx offer great opportunities for investors looking to profit from the rise in e-commerce. Buy either or both of these stocks on any dips in price.
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