Post Office Woes Will Help UPS (UPS)

Post Office Woes Will Help UPS

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First, the good news (for investors): The Department of Labor announced on Thursday a four-month low in unemployment benefits claims. That bit o' news put a trampoline under the plummeting stock market, bouncing prices back up -- at least for one day.

Goodbye ... Newman
Now the bad news (for postal workers): The U.S. Postal Service wants to get rid of 120,000 of its employees. It has proposed cutting that many career positions by 2015. In addition, the USPS wants to lose the federal health and retirement plans for its workers, using less costly private plans instead. These moves would require breaking existing postal union labor contracts.

It also wants to close 3,700 post offices and go to five-days-a-week mail delivery to stem its losses, which have mounted to $20 billion over the past four years. The USPS has already cut 212,000 jobs in the past decade.

A Postal Service paper (PDF link) that The Washington Post obtained, states that "The Postal Service is facing dire economic challenges that threaten its very existence ... If the Postal Service was a private sector business, it would have filed for bankruptcy ..."

Good news for private deliveries
But the Postal Service's problems just make the future look brighter for its private-sector rivals, UPS (NYSE: UPS ) and FedEx (NYSE: FDX ) .

I wrote earlier this summer about UPS as a solid dividend delivery system. With UPS even cheaper now, that yield is more than 3.2%, about what a 20-year U.S. Treasury bond would produce. On top of that, UPS' second-quarter profit rose almost 26% over the same quarter a year ago. FedEx's profit was also up 33.2% over the same period.

Return on invested capital, or ROIC, for UPS was quite good, 13% over the last four quarters. This compares with an ROIC of 6.8% for FedEx. Fellow Fool Jim Royal took a good look at ROIC for these two companies last year and gave a good explanation of that metric's importance. Check it out here.

Are U, S, P, S dead letters?
Any of the changes the Postal Service wants to undertake can only happen with Congress' approval. But it would certainly become another hot-button issue, with anti-union and pro-union factions facing off squarely in a national forum.

It certainly is hard to image having no more post offices, but how long can the U.S. Postal Service go on hemorrhaging money? UPS and FedEx have shown that postal delivery can make a profit. If the USPS can't do the same, it will be writing its own obituary.

Add UPS and FedEx to your watchlist by clicking here.

The Steve Jobs Betrayal
You may already know that in the final year of his life, Jobs revealed a stunning betrayal — and told his biographer, "I will spend my last dying breath... and every penny of Apple's $40 billion in the bank to right this wrong." What was it that made Jobs so irate — and why could it make a few in-the-know investors some major profits over the coming months and years?

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Fool contributor Dan Radovsky has no financial interest in the companies mentioned. The Motley Fool owns shares of United Parcel Service and FedEx. Motley Fool newsletter services have recommended buying shares of FedEx. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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 icon found on every comment.

Report this Comment On August 15, 2011, at 11:34 PM, jbwchief wrote:

it's a crying shame you don't have a clue about what you are writing. no matter what you belive the USPS is not loosing money. over the last four years during this deep recession the USPS has made a profit. the reason their in the red is because congress is pulling around 7.5 billion plus per year out of the money the USPS makes.
ps UPS and Fedex will have to raise their prices considerably if the USPS closes. you should do some research and see how much the USPS saves them annually by delivering the last mile for a large percentage of all packages shipped through them.
Report this Comment On August 15, 2011, at 11:47 PM, Observero0 wrote:

To jbwchief:
Please explain about the $7.5B+ that congress is "pulling out" of USPS. Thanks.
Report this Comment On August 16, 2011, at 7:35 AM, CEPobserver wrote:

While I do not disagree that there is bright future for UPS and FedEx, the demise of the Postal Service hurts these companies rather than helps them. The reasons are fairly simple.
1) The USPS now delivers nearly 30% of the shipments that FedEx Ground picks up from its customers. UPS share is smaller and is unpublicized as UPS does not want to get into hot water with its Unions. The rapid growth in home delivery by FedEx and UPS could not happen without the USPS delivering the lighter weight, lower value parcels.
2) the USPS is FedEx's largest air-frieght customer. Losing the USPS as a customer would mean that many FedEx airplanes that are flying mail during the day would sit on the tarmac depreciating and not earning any revenue. UPS is also a large supplier of USPS air lift.
3) UPS and FedEx's strenghts are in markets that the USPS does not even compete in. UPS and FedEx have 90%+ of the B-2-B parcel market. The USPS market share is less than 5%. UPS and FedEx handle most Parcels over 2 pounds to B-2-C customers as USPS prices have not been competitive for years.
4) The closure of Post Offices will have minimal impact on UPS and FedEx revenue as shipping from retail locations is a small part of their businesses and most of the locations that the USPS is closing do not have a UPS or FedEx location nearby.
Report this Comment On August 17, 2011, at 5:35 PM, Eagle07746 wrote:

To Observero0:
jbwchief is talking about the pre-funding requirements for worker's compensation and retirement healthcare. The Postal Service is the only entity, public or private, that is required to fund its future obligations 100%.
The writer made an astute observation, 20 billion loss = 5 billion for pre-funding since 2006.
Report this Comment On August 17, 2011, at 5:44 PM, Eagle07746 wrote:

Dan Radovsky,
Your right, delivery systems can make money when they have a choice of where they deliver and how much they can surcharge. Unfortunately, the Postal Service has a universal service mandate so there is no choice when it comes to delivering a unprofitable package.

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Post Office Woes Will Help UPS

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Comments from our Foolish Readers

Report this Comment On August 15, 2011, at 11:34 PM, jbwchief wrote:

Report this Comment On August 15, 2011, at 11:47 PM, Observero0 wrote:

Report this Comment On August 16, 2011, at 7:35 AM, CEPobserver wrote:

Report this Comment On August 17, 2011, at 5:35 PM, Eagle07746 wrote:

Report this Comment On August 17, 2011, at 5:44 PM, Eagle07746 wrote:

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