While the parcel delivery industry certainly has its share of big players in United Parcel Service, Inc. (NYSE:UPS) and FedEx Corporation (NYSE:FDX), sometimes it pays to look deeper and examine some of the smaller players in a segment dominated by a few companies. On that note, I’d like to take a look at Forward Air Corporation (NASDAQ:FWRD), which offers surface transportation and logistics services in North America. With very impressive revenue growth as well as an impressive balance sheet, is Forward Air an investment that belongs in the same conversation as the big boys, or is one of them the better bet?
About Forward Air
Forward Air Corporation (NASDAQ:FWRD) provides time-definite ground delivery services and related logistics through its network of freight terminals in 85 cities. The company operates in two main segments: Forward Air and Forward Air Solutions (FASI).
The Forward Air Corporation (NASDAQ:FWRD) segment offers airport-to-airport services to air freight forwarders, air cargo carriers, and cargo airlines. The company uses its airport locations to provide transportation between major cities. The company specializes in air freight that needs to be delivered at a specific time, but is of a less time-sensitive nature than say, overnight mail. The FASI segment provides distribution services to such customers as retail chains and their distribution centers.
Growth, earnings, and valuation
Forward Air Corporation (NASDAQ:FWRD) has grown impressively, with average sales growth of 9.2% annually over the past decade. Despite a slight dip in 2009 due to the recession and the lack of shipping demand resulting from it, Forward Air’s sales have climbed much higher than they ever have been before.
As the U.S. economy continues to strengthen over the next several years, shipping volumes are widely expected to rise at double-digit rates. This increased demand will also allow for increased pricing power, which should lead to higher margins in addition to more shipments. The risks to the projected growth are mostly related to transportation costs. Ground transportation becomes less economical as the price of fuel rises.
Despite the risk of higher gas prices, Forward Air Corporation (NASDAQ:FWRD)’s earnings are expected to grow nicely over the coming years. The company is expected to earn $2.01 per share for the current fiscal year, so shares trade for 19 times current year earnings, which may sound a little high. However, the consensus calls for $2.29 and $2.58 per share in 2014 and 2015, respectively, which corresponds to an average annual earnings growth rate of 13.1%, which more than justifies the valuation. Additionally, Forward Air is very financially sound, and has over $100 million in cash and no long-term debt on its balance sheet.
The big boys
This all sounds great, but I have to wonder if the “big two” might be the better investments. United Parcel Service, Inc. (NYSE:UPS) is the world’s largest express delivery company, and with 84% of its domestic packages being delivered entirely by ground services, it is the closer company to Forward Air Corporation (NASDAQ:FWRD), business-wise. The consensus calls for slightly lower growth than Forward Air (12% annually), and shares trade for 17.6 times this year’s earnings.
United Parcel Service, Inc. (NYSE:UPS) pays a much higher dividend yield (2.8% vs. 1%), but it is worth considering that UPS has a significant amount of debt on its balance sheet ($10.8 billion), which is definitely worth considering when comparing the valuation of the two companies.
FedEx Corporation (NYSE:FDX), on the other hand, focuses more on air express services and actually provides air transport of Priority, Express, and First Class mail for the U.S. Postal Service. While FedEx earns most of its money from air transportation, it does operate the second-largest ground package delivery company in the country, FedEx Ground, which accounts for 24% of the company’s revenue.
FedEx Corporation (NYSE:FDX) is expected to grow its earnings the fastest out of the three at around 16% per year for the next few years, mainly due to the company’s cost-saving programs and anticipated increased domestic and ground volume resulting from the improving U.S. economy. FedEx looks very cheap at just 14 times 2013’s earnings, but the company pays the lowest dividend yield (0.60%) and its high reliance on international economies creates an added risk.
Conclusion
All three companies mentioned here are attractively valued and should produce very nice gains over the next several years as the U.S. economy improves. Forward Air Corporation (NASDAQ:FWRD) is worthy of consideration due to its excellent financial condition and great record of revenue growth. It is also a good pick if you believe (as I do) that the U.S. economy will continue to improve, and want as little exposure to shipping demand in shakier foreign economies as possible.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends FedEx and United Parcel Service.
The article Why This Small Shipping Company Is Worth Considering originally appeared on Fool.com.
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