FedEx and UPS: Spotting Value in a Logistics Storm

The logistics sector faces a perfect storm of macroeconomic headwinds, contract expirations, and shifting demand patterns. Yet, within this turbulence, FedEx (FDX) and UPS (UPS) present intriguing contrarian opportunities. While both companies have revised earnings guidance downward, their free cash flow (FCF) resilience and strategic pivots suggest the market may be overpricing near-term risks. Let's dissect where value lies and how to capitalize on it.

FedEx: Navigating Headwinds with FCF Strength

FedEx has slashed its fiscal 2025 EPS guidance to $19–$20 from $20–$21, citing weaker industrial demand and the loss of its U.S. Postal Service contract. However, the company's operational discipline shines through its FCF performance:
- Q2 FCF hit $954 million, a 53% sequential jump and 25% higher year-over-year.
- TTM FCF rose to $3.4 billion, a 25% increase, despite one fewer operating day and $179 million headwinds from FedEx Freight.

Why this matters: FedEx's FCF resilience suggests it can fund its $2.2 billion DRIVE savings target and spin-off of FedEx Freight without diluting shareholders. Meanwhile, its healthcare vertical—targeting $9 billion in revenue—offers a high-margin growth vector.

Contrarian Thesis:
The stock trades at 14.7x the revised EPS midpoint, below its five-year average of 16.3x. With $5.9 billion in cash and $3.8 billion in buybacks planned, FedEx is aggressively returning capital. The market's focus on near-term volume declines overlooks its cost-cutting and strategic reorganization.

UPS: Strategic Reconfigurations and FCF Stability

UPS's 2025 outlook reflects its own challenges:
- Revenue is projected to drop to $89 billion due to losing 50% of its largest customer and the Coyote Logistics sale.
- Operating margin guidance of 10.8% relies on its “Network Reimagined” initiative, which aims to save $1 billion annually by 2026.

Key Takeaways:
- FCF remains steady: UPS generated $6.3 billion in non-GAAP FCF in 2024, despite revenue headwinds. Its capital spending is disciplined ($3.5 billion in 2025 vs. $3.9 billion in 2024).
- Margin focus: Its international segment delivered a 21.6% non-GAAP margin in Q4, proving profitability in high-demand areas.

Contrarian Angle:
UPS trades at 16.8x 2025 EPS estimates, below its five-year average of 18.5x. While its network overhaul carries short-term costs, the long-term savings could fuel FCF growth.

Cross-Currents: Risks vs. Rewards

Both companies face similar risks:
- Economic sensitivity: Weak industrial demand and B2B volumes pressure revenue.
- Fuel costs: Jet fuel prices remain volatile, though surcharges and hedging mitigate impacts.
- Labor costs: Wage inflation could eat into margins unless offset by automation.

However, their divergent strategies offer opportunities:
- FedEx: Betting on healthcare and FCF-driven buybacks.
- UPS: Focusing on network efficiency and international dominance.

Technical and Options Plays to Capitalize on Volatility

FedEx (FDX):

• Stock price: $260 (as of June 19, 2025).
• Contrarian Buy: The stock is down 12% YTD, yet its FCF and healthcare growth justify a higher multiple.
• Options Strategy: Short OTM puts at $225 strike (e.g., July $225 puts). If FDX holds above $225, the puts expire worthless, netting the premium. This plays on the stock's support near $230.

UPS (UPS):

• Stock price: $220 (as of June 19, 2025).
• Trade Idea: The stock is range-bound between $190 and $230. A bull put spread (selling $190 puts and buying $180 puts) could profit if UPS stays above $190.
• Catalyst Watch: UPS's Q4 results (July 2025) could revalue its network initiatives.

Final Take: Buy the Dip, Hedge the Risk

Both FedEx and UPS are undervalued relative to their FCF generation and strategic pivots. While near-term volatility will persist, the companies' cash flow strength and cost discipline suggest a rebound is priced into the stock.

• FDX: Buy on dips below $250; target $290–$300.
• UPS: Accumulate below $210; target $240.

Hedging: Use the strategies above to limit downside while waiting for catalysts like FedEx's healthcare milestones or UPS's margin improvements.

The logistics sector's storm may be overblown—these stocks are worth the risk for patient investors.

Disclosure: This analysis is for informational purposes only. Always consult a financial advisor before making investment decisions.