Which Freight Company Will Deliver the Best Returns?

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Monday, Dec. 12 was expected to be the busiest day ever for the delivery service FedEx (NYS: FDX) . It was estimated that the company would ship 17 million packages in just that one day! Does this mean we should all run out and jump on the FedEx truck? Some analysts would say yes, but I believe there is a better carrier your money should be riding on.

The table below shows a few of the major players in this industry.

Company

P/E

Dividend Yield

Profit Margin (TTM)

Free Cash Flow

(TTM)

FedEx15.320.60%4.24%$606
United Parcel Service (NYS: UPS) 17.592.90%7.85%$3,339
Forward Air (NAS: FWRD) 21.550.90%8.55%$47
Hub Group (NAS: HUBG) 22.53N/A2.16%$9

Sources: S&P Capital IQ and Yahoo! Finance. N/A = not applicable; Hub Group doesn't pay a dividend. Free cash flow in millions.

Let's compare the two biggest players and see which one may deliver the best returns. UPS and FedEx operate in the package shipping and delivery market domestically and internationally. FedEx is slightly cheaper, with a price-to-earnings ratio of just over 15. The two companies benefited from Deutsche Post DHL pulling out of U.S. delivery service, and would also stand to gain from delivery cutbacks currently being discussed by the United States Postal Service.

Giving back to shareholders
FedEx only has a third of the number of outstanding shares that UPS has on the open market, but while FedEx continues adding shares, UPS has been lowering the number. The chart below shows this trend since 2007.

Lowering the number of shares outstanding increases the value of each share still held on the open market or in your portfolio. The 8.34% decrease in number of shares may not seem like a large amount, but when there are just over a billion shares, that 8.34% turns into about a 100-million-share reduction.

Late to the party
In 2001, UPS purchased Mail Boxes Etc. for an estimated $200 million and received over 4,300 new locations for customers to drop off packages for delivery. Two years later, FedEx purchased Kinko's 1,200 locations for nearly $2.4 billion. Some analysts consider this a wasteful acquisition and believe FedEx would have been better off instead partnering with Kinko's, or other companies such as Staples or Office Depot. Partnering could have saved FedEx a great deal of money, as well as allowing the office supply companies to incur the costs and risks of the copying and printing business.

Management decision
The 17 million packages FedEx was expected to deliver is a large number, but let's remember that was only one day. On average the company delivers 7.26 million packages every business day. UPS' average daily package volume is 15 million! That's not all -- UPS has also been much more efficient with delivery services, resulting in a profit margin of 7.85%, while FedEx only manages 4.23%.

Although both companies use the standard hub-and-spoke system, what UPS does differently is bundle both overnight and regular packages together once they arrive at the final delivery stage. UPS has a single driver take all items to a single location. This saves UPS money and allows the company to realize its better profit margins. FedEx, on the other hand, employs a different delivery strategy. It will have two drivers go to one location in a single day, one delivering standard packages and the other delivering overnight packages.

Foolish takeaway
FedEx is a great company, and if it continues to grow, it shows great promise for the future. But I believe UPS is currently a safer and more reliable long-term investment. The fact that UPS realizes almost double the profit margin that FedEx does, coupled with UPS' 2.90% dividend yield, makes me like Brown better. I am a sucker for nice quarterly payout. That's why I would also recommend you take a look at this free report about 11 rock-solid dividend-paying stocks. Find out about 11 more unbelievable companies that give back every quarter.

At the time this article was published

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