Tuesday, October 28, 2008


Fedex (FDX) and UPS (UPS) have both faced tremendous challenges in the last year. Fedex is under fire for employee/contractor classifications, and both companies have faced soaring fuel prices and a slowing global economy. As such, the market may be punishing these very profitable companies, thereby offering long-term investors the opportunity to buy in at decent prices.

To gauge just how sour the market is on these companies, a look at their historical price to book ratios could be useful. In order to maintain and grow their operations, both companies must invest in transportation equipment, distribution centres, and technology; therefore we might expect the market value of these companies to be somewhat correlated to their book values. At the same time, as these companies increase their global scale, we would expect them to benefit from economies of scale, so we don't want to use P/B values from too far back.

Here's a look at the price to book values of Fedex and UPS over the last decade:

We clearly see the market souring on these firms, especially on Fedex. And as opposed to when we looked at the P/B values of banks and home builders, the book values of these companies are stable and not currently undergoing large write-downs.

Of course, this doesn't make either company a buy. Before buying, one must still look at the financial statements and understand what is being purchased. One interesting note is that UPS appears to trade at a huge premium to Fedex as a multiple of book value...why might that be? We'll explore this issue in a future post...

1 comment:

Anonymous said...

Good post. I'll be looking forward to future analysis as I have an invested interest in UPS. While Fedex may or may not be cheaper I like the operational advantages that UPS has and the more global scale in operations.

Sucks that I'm down so much on it, but I think thats the same boat almost everyone is in right now.