Which Stock Is A Better Pick For The Next Three Years – FedEx Or UNH?

We believe that UnitedHealth stock (NYSE: UNH), included in the S&P500, is a better pick than FedEx stock (NYSE: FDX), also in the S&P500, given its better prospects. Although these companies are from different sectors, we compare them because they have a similar P/EBIT ratio of 14x-15x. The decision to invest often comes down to finding the best stocks within the parameters of certain characteristics that suit an investment style. The size of profits can matter, as larger profits can imply greater market power. Since these stocks are from different sectors, comparing P/S against one another may not be helpful. We compare their current multiples with the historical ones in the sections below to better compare their valuations.

Looking at stock returns, FedEx has fared much better with 43% returns this year, while UnitedHealth is down 11%, and the broader S&P500 index is up 14%. There is more to the comparison, and in the sections below, we discuss why we believe UNH will offer higher returns than FDX in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of FedEx vs. UnitedHealth: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Revenue Growth For FDX And UNH Is Comparable

• FedEx’s 9.7% average annual growth rate in the last three years is comparable to 10.2% for UnitedHealth.
• UnitedHealth’s revenue growth was primarily driven by the increased demand for its OptumHealth business, which provides health care through local medical groups. For perspective, OptumHealth’s revenue grew 135% between 2019 and 2022, compared to a 34% rise in revenue for the overall company.
• The strong growth in the OptumHealth business can be attributed to a rise in the number of patients served under the company’s value-based arrangements, including at-home services.
• UnitedHealth’s total medical enrollments are also on the rise, currently at 51.7 million, compared to 49.2 million in 2019, before the pandemic.
• The revenue growth for FedEx was driven by shelter-in-place restrictions and the spread of the Covid-19 virus, resulting in e-commerce growth.
• However, this trend is now cooling off, weighing on revenue growth rates and delivery volumes.
• For perspective, FedEx saw its average daily package volume decline by 10%, 7%, and 11% for its Express, Ground, and Freight segments in fiscal 2023 (fiscal ends in May), respectively.
• If we look at the last twelve months, UnitedHealth fares better with sales growth of 12.9% vs. -3.6% for FedEx.
• Our FedEx Revenue Comparison and UnitedHealth Revenue Comparison dashboards provide more insight into the companies’ sales.
• Looking forward, UnitedHealth’s revenue is expected to grow faster than FedEx’s over the next three years. We expect the sales to grow at a CAGR of 4.8% for FedEx compared to a 7.7% CAGR for UnitedHealth, based on Trefis Machine Learning analysis.
• Note that we have different methodologies for companies negatively impacted by Covid and those not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to predict recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.

2. UnitedHealth Is More Profitable

• FedEx’s operating margin has risen from 2.6% in 2019 to 6.6% in 2022 and 5.9% in 2023, while UnitedHealth’s operating margin rose slightly from 8.1% to 8.8% over this period.
• Also, looking at the last twelve months period, UnitedHealth’s operating margin of 8.8% fares better than 5.9% for FedEx.
• The decline in operating margin for FedEx can be attributed to higher operational costs, primarily fuel, and declining volumes.
• Our FedEx Operating Income Comparison and UnitedHealth Operating Income Comparison dashboards have more details.
• Looking at financial risk, UnitedHealth fares better with its 16% debt as a percentage of equity significantly lower than 76% for FedEx and its 16% cash as a percentage of assets higher than 6% for the latter, implying that UNH has a better debt position and more cash cushion.

3. The Net of It All

• We see that UnitedHealth has demonstrated marginally better revenue growth, is more profitable, and has a better debt position and cash cushion. To some extent, this also explains its higher P/S multiple of 1.3x sales compared to 0.7x for FedEx.
• Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe UnitedHealth is still the better choice of the two, despite its higher P/S multiple.
• If we compare the current valuation multiples to the historical averages, UnitedHealth fares better, with its stock currently trading at 1.3x revenues vs. the last five-year average of 1.5x. In contrast, FedEx’s stock trades at 0.7x revenues aligning with its last five-year average.
• Our FedEx (FDX) Valuation Ratios Comparison and UnitedHealth (UNH) Valuation Ratios Comparison offers more details.
• The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 10% for FedEx over this period vs. a 17% expected return for UnitedHealth, based on Trefis Machine Learning analysis – FedEx vs. UnitedHealth – which also provides more details on how we arrive at these numbers.

While UNH may outperform FDX in the next three years, it is helpful to see how FedEx’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities, which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for FedEx vs. Amerco.

Despite higher inflation and the Fed raising interest rates, FedEx stock has risen 43% this year. But can it drop from here? See how low FedEx stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.

[1] Month-to-date and year-to-date as of 6/29/2023
[2] Cumulative total returns since the end of 2016