FedEx Wants to Squeeze Money From a Turnip

As economies around the globe fall flat off the face of the earth, commerce withers, and oil prices plummet, FedEx (NYSE: FDX  ) and UPS (NYSE: UPSE  ) have taken a curious course: They're raising prices.

UPS says it is raising shipping rates at its North American freight division this month, by 6.9%. On Monday, FedEx decided to follow suit, cheekily announcing a six-point-eight percent (what a bargain!) increase in the amount it charges at FedEx Freight. On one hand, this is probably good news for folks who invest in companies that compete with FedEx and UPS -- less-than-truckload-weight shippers such as YRC Wolrdwide (Nasdaq: YRCW  ) , Con-way (NYSE: CNW  ) , and Old Dominion Freight Line (Nasdaq: ODFL  ) . These shippers now have the option of grabbing market share by undercutting their rivals' just-increased prices, or grabbing extra profit margin by falling in line with the higher prices.  It seems a battle could be in the works.

On the other hand, though, it does seem a bit strange that FedEx and UPS think the moment the global economy implodes is the precise best time to raise their own prices … the more so when you consider that both companies are already going gangbusters, in terms of profits. I mean, FedEx just got finished reporting its most profitable quarter since June 2007. UPS just posted a 25% pop in year-over-year quarterly profit. And now they tell customers they need to charge even more money for their services? Seems to me they really are running some risk of losing market share in reaching for extra profits.

Then again, maybe now really is a good time to make the move. After all, the U.S. Postal Service just announced the next thing to a going-out-of-business sale, shuttering 3,700 post offices in addition to the usual rumblings about cutting Saturday service and raising stamp prices. While not a direct competitor to LTL shipping, it's clear that the competitive environment for UPS and FedEx is opening up -- and the fewer the competitors, the fewer reasons to worry that customers will go elsewhere.

Foolish takeaway
So what's the upshot for investors? At 16 times earnings and an 11% long-term growth rate, UPS's rate increase probably doesn't move the valuation needle much. FedEx, however, sells for an equally attractive 17 times earnings -- and was pegged for 16% growth before this week's price increase. Long story short, FedEx just got 6.8% closer to being a bargain.

Even if FedEx and UPS lose cost-conscious customers from this move, will they make it up on margin? Add both stocks to your Fool Watchlist, and find out.

Fool contributor Rich Smith does not own (or short) shares of any stock named above. The Motley Fool owns shares of FedEx and United Parcel Service. Motley Fool newsletter services have recommended buying shares of FedEx.

We Fools don't 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.


Read/Post Comments (9) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 10, 2011, at 7:37 PM, jesterisdead wrote:

    UPS is more expensive, raised their rates more and in my experience - slower. Why are you picking on FedEx?

  • Report this Comment On August 10, 2011, at 9:18 PM, Romes99 wrote:

    The writer did not do his research. Conway and YRCW took their Increases this month.

  • Report this Comment On August 11, 2011, at 9:53 AM, jg2448y3k wrote:

    The writer really needs to do some homework before writing stuff like this. If he took just 30 minutes to study the LTL industry and how the pricing works he would realize that just about all companies have signed tariffs in place and are not subject to this rate increase. This increase only impacts small shippers that are on base rates. All big companies have contracts with the LTL companies and are on custom tariffs so when FedEx, UPS, or other LTL companies have increaes it doesn't mean an automatic 6.8% automaticaly

  • Report this Comment On August 11, 2011, at 1:46 PM, Mustang6147 wrote:

    The fool is just that. Do Your Homework Fool or you will look like a fool

  • Report this Comment On August 11, 2011, at 2:05 PM, auu1dtt wrote:

    1) Please do your research and provide complete information

    2) Understand the transportation sector and how it works

  • Report this Comment On August 11, 2011, at 5:00 PM, truckingguru wrote:

    rich

    when you address UPS and FedEx LTL, break the numbers out. FedEx and UPS LTL divisions have been losing money aand are trying to turn it around. YRC and conway have also announced increases.

    FedEx started a price war two years ago to go after YRC and it did not work too well.

    you need to understand that on average 40-50% of pricing between a company and an LTL carrier is under contract and exempt from a general rate increase. this means the other 50-60% is subject to the increase.

    When you take into effect mc shiment percentage by account, the actual net effect is around 3-3.5% increase, not 6%. Lastly, not all of these accounts subject to the GRI will accept it so some horse trading begins here.

  • Report this Comment On August 11, 2011, at 6:44 PM, jiraffe01 wrote:

    Rich - I think every comment so far, should tell you that LTL carriers have been beaten down for years to earn a minor yield.

    Most of the top Regional carriers that FedEx Freight and UPS Freight compete with have taken increases.

    By the way, the rate increases are not thought up in an instant, they are well thoughtout and planned for well ahead of the actual GRI being taken.

    This is an industry that has not had the healthy end of the stick for many, many years and it is about time that they get paid for the services they perform.

    Trucking is a great industry and many who do their jobs every day are not shown the appreciation they should be. To make statements about an industry you have not researched is not helping anyone.

  • Report this Comment On August 12, 2011, at 5:59 PM, pirate2011 wrote:

    FedEx freight is a dinosaur, it will end up going the way of YRCW. They now are using Common carriers to move freight from one terminal to another so they don't have to pay their drivers, their OS&D is sky rocketing, and management treats the employee's in a hostile manner. The clock is ticking on this LTL to see when it gets spun off.

  • Report this Comment On August 12, 2011, at 11:26 PM, PWHunt69 wrote:

    Pirate2011 you are correct.....everything you say is correct. Things have gotten out of hand, focus is no longer on the product, but the process......

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