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FedEx Corporation's Earnings: What They Mean for UPS Investors

By Markets

FedEx Corporation's (NYSE: FDX) recent first-quarter earnings were warmly received by the market, but does that meanUnited Parcel Service, Inc (NYSE: UPS) will also report a good set of results in a month's time? Therivals reportin the middle of each others' quarters, so UPS stockholders should keep a close eye out foranything FedEx's management says. That said, here are five key things for investors to note.

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FDX data by YCharts.

FedEx follows UPS in hiking prices

In a widely expected move, FedEx followed UPS in hiking shipping rates. The reasons behind this move have been discussed elsewhere, so suffice it to say that both companies are trying to increase yields (or revenue per package) in response to strong e-commerce demand. That both feel capable of doing this -- despite the hoopla surrounding competition from is an indication that there is enough e-commerce growth to go around, and that profit maximization, rather than just chasing volume, is the name of the game.

Moreover, if FedEx is following UPS' lead in increasing prices, then UPS is unlikely to suffer some kind of volume shortfall due to raising its own prices.

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FedEx's economic outlook

The chart below shows you how FedEx's management has adjusted its forecast for economic growth and industrial productionin2016. For reference, the first guidance shown (given at the Q2 2016 results) was given in December 2015. As you can see below, growth expectations have been reduced throughout the calendar year.

This is normally a bad sign for UPS and FedEx, because delivery volumes are traditionally seen as economically sensitive, and industrial production is obviously a driver of business-to-business (B2B) delivery activity.

However, both companies have offset disappointments in B2B and freight growth by growing their e-commerce and business-to-consumer deliveries. As such, the fact that FedEx's earnings remain on track despite weaker economic conditions augers well for UPS.

Image source: FedEx Corporation presentations.

Ground margin

Despite lower fuel surcharges and cost pressures building from network expansion, FedEx managed to increase its ground segment operating margin from 14% to 14.2% in the quarter -- a good result under the circumstances. It suggests that UPS may also be able to do the sameby offsetting any negative margin pressure with volume growth.

E-commerce is providing United Parcel Service, Inc., and FedEx Corporation with growth opportunities, but also challenges dealing with peak demand periods. Image source: Getty Images.

FedEx and UPS dealing with peak

UPS suffered profit shortfalls in the winter quarters of 2013/2014 (a severe winter that caused issues for FedEx, too) and 2014/2015 because of struggles dealing with peak demand during the holiday season. Although last year proved relatively trouble-free, investors may still have concerns about the upcoming holiday period.

In this vein, CEO of FedEx Services Mike Glenn's commentary on the evolution of peak trading was fascinating: "Holiday promotions and buying patterns have increasingly shifted, which has resulted in heavy demand for package delivery on Mondays during the peak." And "we expect each of the four Mondays during the upcoming peak period to be among the busiest in our company's history."

Now, this may not be groundbreaking news to UPS' management, but it's likely to soothe investors' fears. The reason? In the winter of 2014/2015, UPS' problem with peak mainly related to having too much capacity (therefore costs) on the wrong days. Therefore, if both companies are getting a better read on how tradingtends to panout (heavy volume on Mondays), then there should be less risk of such an occurrence in the future.

Demand for premium services

Finally, FedEx's results confirmed an interesting trend whereby growth in demand for premium services is more than growth in demand for slower, less expensive delivery options. You can see this by comparing volume growth for FedEx's U.S. overnight box service with its U.S. deferred service.

For ease of reference, I've put the latest revenue per package figure in the key.

Data source: FedEx corporation presentations.

You can notice the same trend developing when comparing volume growth at UPS' U.S. next-day air service with its U.S. deferred service.

Data source: United Parcel Service presentations.

It's interesting because it suggests that UPS' premium services are going to have a good quarter -- something that might helpimprove profitability.

The bottom line

FedEx's earnings report was broadly positive for UPS. Both companies are battling weaker economic growth, but the message from FedEx's results is that e-commerce volume growth, and demand for premium services, is more than enough to offset any weakness in the economy. Meanwhile, both companies appear to be getting a good handle on how to deal with peak demand during the holiday season.

All told, UPS investors have good reason to look positively on the next earnings report.

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Lee Samaha has no position in any stocks mentioned. The Motley Fool owns shares of and recommends and FedEx. The Motley Fool recommends United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.