Brown Is Beautiful

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Investors uncertain about the state of the U.S. economy would do well to keep an eye on two companies that play big parts in moving goods between producers and consumers -- and whose businesses therefore reflect the strength of the economy pretty well. Last month, Motley Fool Stock Advisor pick FedEx (NYSE: FDX) posted a nearly 50% increase in profits over last year; today, despite the recent stock market slump, the company is sitting within spitting distance (as we say here in the South) of its 52-week high.

As for the other side of the picture, FedEx's big and brown archrival United Parcel Service (NYSE: UPS) reported its own second-quarter results today. UPS didn't make out as well as did the lads from Tennessee, but with profits up 18% over last year on an 8% bump in revenue, I am betting UPS shareholders won't be complaining too loudly. Especially given UPS' projections that it will continue to deliver good news over the next two quarters. Having already projected a 12% to 18% earnings increase over 2003, UPS is now guiding analysts toward the upper end of that range.

The news on margins supports that assessment. Operating margins rose from 13.1% to 14.8%, and half of that increase survived a 31% increase in the company's tax bill to fall to the bottom line, where net margins rose from 8.4% to 9.2%.

Meanwhile, stock dilution is a complete non-issue at UPS, where diluted shares outstanding increased just a couple tenths of 1%.

But does all of that make UPS a "buy"? For the U.S. economy -- sure, I'd buy that. Even though UPS enjoyed its fastest revenue growth abroad, and in export/import operations across the U.S. border, its U.S. domestic business also prospered last quarter, and that means our economy in general appears healthy, if not exactly steroid-driven.

But for UPS in particular, this value-loving Fool would hold off on buying, in hopes of a continued market "correction" helping to deflate the stock's price. UPS currently trades at a trailing P/E ratio of 27 and a trailing enterprise value-to-free cash flow ratio of 26. If you compare either of those numbers to analyst projections of 13% long-term earnings growth (and long-term is what we are all about at the Fool), UPS seems fully valued -- indeed, priced at a premium -- in comparison to the market at large.

Fool contributor Rich Smith owns no shares in any company mentioned in this article.