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Long-Term, Post Office Troubles Bound to Benefit FedEx and UPS Shares

The U.S. Postal Service is in dire straights, and this, ironically, is both good and bad news for the two big shipping companies that compete with it. But as USPS takes on cost-cutting measures that will make its own services crappier, the long-term outlooks for FedEx (FDX) and United Parcel Service (UPS) are looking better and better.

Short-term, there’s little reason for either company to celebrate trouble at USPS, which last month reported a $5.2 billion quarterly loss. Both FedEx and UPS collect big money for ferrying Postal Service mail long distances, often during their own slow hours. USPS paid FedEx, its biggest supplier, some $1.5 billion in its last fiscal year, according to Husch Blackwell LLC, a law firm that crunched the numbers. That’s about 3.5% of FedEx’s total revenues in the latest 12 months. UPS collected about $102 million from USPS, which is a far less significant portion of its own revenues. Still, this was much-appreciated business for both companies at a time when growth has been modest, and it’s in their interest for USPS to remain solvent enough to pay their bills.

FDX Revenue Growth Chart

FDX Revenue Growth data by YCharts

But proposals to save USPS look like real gifts to both private companies. Those plans, which Congress will soon reconsider, put an end to the promise of overnight delivery for a 45-cent stamp. Most would eventually end Saturday delivery altogether, and the number of distribution centers would shrink. Even if those cutbacks don’t directly push customers to FedEx and UPS – and they would, to some extent -- they may still fill their coffers by giving them more outsourcing business. If USPS can’t get its packages delivered on time without paying competitors now, it will need them even more when it has fewer resources.

There’s very little in USPS’ “Plan to Profitability” about Express or Priority Mail, the post office’s most serious threats to the private sector. Package shipping altogether brought in $10.6 billion in revenues for USPS in the last nine months, up almost 10% from a year earlier, mainly because of booming e-commerce sales; thank you, Amazon (AMZN). But amping up those products to take advantage of the trend would require investing in them, and the post office doesn’t have any money. Congress isn’t likely to allocate any investment money either.

FedEx and UPS, on the other hand, are very good at making big capital investments that pay off. Although buying, maintaining and fueling huge fleets of planes and trucks are expensive, YCharts Pro gives both companies great marks for managing their balance sheets well. UPS has had big share buybacks that help its return on invested capital skew higher, but both companies have achieved good results even while business conditions weren’t optimal.

FDX Return on Invested Capital Chart

FDX Return on Invested Capital data by YCharts

Business still isn’t great for either company. Last year, high fuel costs hit hard. Now, weak sales overseas, where profit margins are much better, are dragging on earnings. Neither company has been a stellar investment in the past couple of years.

FDX Chart

FDX data by YCharts

FedEx is far more vulnerable to USPS problems, both as a supplier and as a customer. (USPS takes over the last leg of FedEx delivery on some rural routes; the least profitable part.) Most of its supply contracts with USPS expire this month and are being rebid. With USPS under great pressure to save money, expect FedEx to give up margin or lose the contract to a competitor; possibly UPS. Expect both of them to pick up USPS customers as money for marketing and other expenses dries up for those products.

Most analysts that follow the sector recommend both shares, although few expect a quick recovery in share prices. FedEx is considered the more undervalued of the two, but UPS comes with a 3.1% dividend yield. They’re liked because they’re large, well-run companies that dominate their competition in a business that will, at some point, rebound, with or without the U.S. Postal Service.

Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.

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