Brown Is Beautiful

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.