Best economic indicators these days? FedEx and UPS

Wondering about the health of the U.S. economy? Wonder no more: One of the clearest indicators of how the economy is faring is the level of business activity at FedEx (FDX) and UPS (UPS).

Revenues and margins are rising at both FedEx, which provides air-express services for packages and freight in more than 220 countries, and UPS, the world’s largest express-delivery company, thanks to the recovering U.S. economy and the rapid growth of online shopping. Shares of the two companies also have been on the rise: The price of FedEx’s stock, at about $173 on Thursday, is up from its 52-week low of $119, while UPS’ class B stock is at about $109 a share, up from its 52-week low of around $87.

FedEx on Tuesday reported strong first-quarter results for its current fiscal year. Earnings climbed to $715 million, or $2.65 a share, from the $692 million, or $2.42 a share, it had reported for the year-earlier period. All this on first-quarter revenue that jumped to $14.7 billion from $12.3 billion (aided in part by FedEx’s recent acquisition of TNT Express, one of Europe’s largest express-delivery companies).

S&P Global Market Intelligence, which rates FedEx a “strong buy,” this week boosted its 12-month target price for the stock by $5 a share, to $200, citing “surging online sales” for the bullishness. “We think this valuation could expand on better economic news,” Jim Corridore, equity analyst at S&P Global, said in a report.

“A recovering economy coupled with the rapid growth of e-commerce should provide a lift to revenues, volumes and operating margins,” Corridore wrote, describing FedEx as “well positioned” to benefit from growing volumes of shipments over the next several years.

Online shopping has been a huge blessing to both FedEx and UPS. Total online sales are forecast to grow at an average annual rate of 9.3 percent over the next five years, according to Forrester Research, soaring to $523 billion by 2020 from $335 billion in 2015. The e-commerce share of total retail sales is expected to expand to 11% in 2018 from 7.5 percent in the second quarter of this year.

While brick-and-mortar sales are still likely to comprise the lion’s share of retail sales, “online sales are growing faster and significantly,” Corridore noted. FedEx and UPS benefit directly from online sales as they are the ones that bring packages to a customer’s door. They also transport products to e-tailers’ warehouses and inventories to and from manufacturing facilities. With the two companies having large infrastructure investments in planes, trucks and sorting facilities, they benefit from significant “positive impacts on operating margins, as well,” Corridore said.

The analyst rates UPS as a buy with a price target of $130 a share. He thinks revenues -- $58.3 billion last year -- will rise 4.4 percent in 2016 and another 4.5 percent in 2017. He also expects operating margins to improve in both years based on higher volumes, improved efficiency, and lower fuel costs. 

Corridore expects EBITDA (earnings before interest, taxes, depreciation and amortization) margins of 17.3 percent in 2016 and 2017, up from 16.7 percent in 2015. He estimates UPS will earn $5.81 a share in fiscal 2016, up from $5.35 last year, and sees earnings rising to $6.21 billion in 2017. 

UPS’ recent investments in infrastructure to capitalize on e-commerce growth should especially boost volume and margins during the coming holiday season, the analyst said. His price target of $130 a share values the stock at 20.5 times his 2017 earnings estimate, toward the lower end of UPS’s price-earnings ratio range during the past 10 years.