Will the Delivery Companies Deliver?

In another few days, the holiday frenzy will be over for international deliverers FedEx (NYSE: FDX) and United Parcel Service (NYSE: UPS), and U.S. economy watchers will figuratively place stethoscopes to the company's chests. After all, they're both economic bellwethers, but FedEx now will have a new -- and potentially expensive -- IRS note to lug with it on its runs.

Thus far, both companies have been affected by a combination of higher fuel prices and a generally slowing domestic economy. But late last week, after it had released its quarterly results -- which, as my Foolish colleague Rich Smith told you, were "better than expected" -- FedEx disclosed that it will now have to contend with new attention from Uncle Sam in the form of the Internal Revenue Service. The IRS' pursuit of the company relates to an independent contractor model that lets FedEx avoid benefits costs for about 15,000 drivers. In contrast, at UPS, the drivers are unionized employees.

Apparently, the company's back taxes and penalties could range from about $320 million to -- as one analyst maintains -- as much as $1.5 billion. The IRS attention also comes at precisely the time that FedEx is contesting lawsuits in three dozen states where contract drivers allege that the company's level of control over their work renders them employees and thereby eligible for benefits.

And if all that weren't enough, the Teamsters union is attempting to organize FedEx's drivers. Considering this trio of challenges to the company, it appears likely that its human resources costs are poised to increase.

UPS recently inked a new Teamsters contract covering a whopping 238,000 drivers and other workers, the largest single union pact ever signed. As part of the agreement, the company is being permitted to withdraw from the Teamsters' Central States Pension Fund. That will potentially lower its pension and benefits costs, an area in which it's typically lagged FedEx.

I admit to be being of two minds on this pair of Foolish newsletter picks (FedEx is a Stock Advisor selection, while UPS is an Income Investor designee) as we enter 2008. Both are obviously quality operators with tremendous international footprints, and that's good. But FedEx's IRS missive adds further uncertainty that the market generally doesn't like, and both have also been directly affected by 2007's ramp in oil prices, which I don't expect to reverse itself meaningfully next year.

Of course, a few companies -- Deere and Freeport McMoRan probably among them -- may withstand economic softness domestically. But in the case of the delivery folks, my inclination is to suggest backing off unless their share prices or energy costs (or both) pull back more than a little bit.

For related Foolishness:

• Taking a Flyer on FedEx
• Make Millions From Thousands
• A Disaster You Can Prevent

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