Ups Vs Fedex

Industry wide, revenues topped $70 billion dollars a year in the parcel delivery business, a market that two giants attack with two very different business models. UPS which was founded in 1907 as a messenger company in the United States has grown into a billion dollar corporation. FedEx Corporation was founded in 1971 as the first next day air supplier and today profits are also in the billions. Which leads us to the question, which one of these companies are better managed and which one is the better investment?

The companies' financials stack up like this: UPS has annual revenues of $36 billion, while FedEx has $26 billion. But UPS has a market capitalization, or total stock market value, that's four times that of its rival: $82 billion compared to FedEx's $22 billion. UPS trades at twice the price-to-book ratio that FedEx does. In the air FedEx dominates with the world's largest air delivery service, carrying 25 percent more air shipments each day than UPS, but this is why FedEx has such a higher cost of revenue compared to UPS. On the ground UPS is five times the size of FedEx, delivering 13 million packages a day. That's more than five percent of the U.S. economic output. Despite the size of UPS there operating cost only average around 4 billion compared to FedEx at 16 billion. UPS also makes more money per package but FedEx is catching up. In fact, 4 years ago, UPS made $5.50 more per delivered package than FedEx. Today, that premium is down to $3.00.

With this information one could make the assumption that UPS is the better managed company and therefore probably the better investment, but what if FedEx grew to the size of UPS ground. There are, however, signs of a shift in momentum on the ground, FedEx is gaining, UPS is losing and it's on the ground where the difference in business models is most evident. FedEx works on an owner/operator model: where some 16,000 people have a direct stake in the company's success, while UPS is unionized. UPS still controls 80% of all U.S. ground shipments, compared with 15% for FedEx. But the FedEx Ground unit is growing far faster. FedEx' domestic average daily volume of packages rose 11.8% in the three months ended Aug. 31, while UPS's fell 2.1%. Even more important is the contribution to the bottom line. FedEx Ground generated 12% operating margins, which nearly quadruple those for the company's air express unit.

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