The following article is part of The Motley Fool's "Stock Madness 2005," a contest based loosely on the annual NCAA College Basketball Tournament, a.k.a. March Madness. The following article is part of The Motley Fool's "Stock Madness 2005," a contest based loosely on the annual NCAA College Basketball Tournament, a.k.a. March Madness. From March 17 to April 6, our writers and analysts will engage in head-to-head competition with each other, advocating and arguing on behalf of 64 stocks we've selected as among the most interesting to Foolish investors. You, dear readers, are the fans and referees -- you'll read these exciting duels and then vote for the stock you think is the better investment.and should therefore move on to the next round of play. The company that survives six "games" will be our tournament champion, and its writer our most valuable "coach."
But, please, make no mistake -- "Stock Madness 2005" is a GAME!
Our writers are doing this for fun. They are enjoying the spirit of competition and the art of debate. They are delighting in the search for positives in the companies they've drawn.and negatives in the companies they're pitted against. They are NOT necessarily recommending these stocks as the ones they believe in above all others. As ever, YOU must decide whether the stocks we're writing about -- winners and losers -- are deserving of your investment dollars.
UPS (NYSE: UPS)
Atlanta
, Ga.
$71.64
52-week low-high: $68.55-$89.11
$80.1 billion market cap
By Nathan Slaughter
UPS is truly among the elite to be surrounded by names like Netflix (Nasdaq: NFLX), Apple (Nasdaq: AAPL), and Sirius (Nasdaq: SIRI), some of the other companies still vying for the coveted inaugural Stock Madness trophy. The company has no pregame jitters as it goes through its warm-ups today, though, because it is loaded with that one quality that is absolutely critical at this stage of the tournament -- experience.
UPS has a successful 100-year track record of delivering packages from point A to point B, and today those points have been expanded to include virtually every single address in North America and Europe -- as well as millions of additional homes and businesses in more than 200 countries worldwide. The company has committed a tremendous amount of time and resources to building its globe-spanning distribution network, and it's only now beginning to reap all the rewards.
As it showcased in the first three rounds, UPS is delivering more packages to more destinations more profitably and in a shorter amount of time than it ever has before. Today the company will probably deliver around 14 million packages, just like it did every day last year en route to a record 3.6 billion. Tomorrow -- and I mean that figuratively, of course -- that total will likely be even higher, as an explosion of online commerce continues to fuel deliveries. Just imagine how many winning eBay (Nasdaq: EBAY) auctions wind up in the backs of brown delivery vans in neighborhoods all over the country.
Furthermore, the company's strong retail presence -- more than 5,000 UPS Stores and Mail Boxes Etc. locations -- is seven times as large as the nearest competitor, and the local post-office alternatives are also channeling truckloads of business.
Meanwhile, my worthy opponent, Valero, has been enjoying a perfect operating climate, raining down three-pointers from every spot on the court. I wonder, though, what happens when some of those shots begin to miss their target. Yes, there is a definite lack of refining capacity. And yes, the wider spreads involved in processing sour crude -- Valero's strength -- are leading to juicier margins. Don't think for a second, though, that any of this has escaped the attention of its rivals, many of whom have deep pockets and are willing to upgrade to chip into Valero's 2.5% share of what is a very fragmented market.
Valero shareholders who love the peaks of this highly cyclical business should also be prepared to endure some stomach-churning drops. Operating margins are modest even in the best of circumstances, and they become razor-thin when times get tough. In the past five years, profitability metrics have bounced all over the place, and earnings have gone from a low of $0.13 up to $4.42, and then back down to $0.42, and then up again. Follow the trend here: up, down, up, down, and now currently up.
Rather than subject myself to a roller-coaster ride like that with my fingers crossed that volatile commodity prices don't suddenly spring the wrong way and narrow the spread, I'll take a much smoother, albeit crowded, flight on UPS.
Fool contributor Nathan Slaughter owns none of the companies mentioned.
Valero (NYSE: VLO)
San Antonio, Texas
$75.77
52-week low-high: $27.95-$78.03
$19.4 billion market cap
By Bill Mann (TMF Otter)
Dear UPS,
Do your trucks use a whole lot of gasoline? What's that, you say? You have 1,800 motor vehicles that use alternative energy? You don't say! That's simply fantastic. Out of how many, total? Uh-huh. And some of the alternative ones run on propane? I see. That's a lot of trucks. Are they all brown? Yeah, I know. I'm just kidding. So, what you're saying is that the majority of your motor fleet still runs on gasoline and other petrocarbons? How much did that cost you last year?
Wow. I see. That's a lot.
OK, let me ask you another question. How about your air fleet? Any of those electric? No? They all run on jet fuel, don't they? What do you mean, "Did I see the letter?" What letter? Oh, you mean the one on March 7, when you announced that there would be a $0.35-per-kilo fuel service charge because of the high cost of fuel? Yeah, I guess I did see it. No, there's no much we can do about that. I mean, sure, oil products would be cheaper if more refiners had done what we did and changed their slate to lower-cost sour crude, but they didn't. Yeah, the big spreads and high costs are pretty good for us. Never better. Really sorry to hear about your hardship. If there were something I could do, believe me, I would. What could I do for Brown? I wish I knew. I reckon you'll just have to hope oil prices come back down. No, that wouldn't necessarily be bad for us, either, as long as the crack spread between sour and sweet remains as wide as the Rio Grande.
And with that, I'd like to thank you, as always, for your business.
Humbly,
Valero
Bill Mann is pretty sure this letter was ghostwritten. He owns no stock in any company mentioned in this article.
Rebuttals:
Dear Valero,
Thank you for your recent inquiry regarding the state of our energy costs. Your heartfelt concern is, as always, much appreciated.
Fortunately, you will be pleased to know that our net profit margins remain at a healthy 9%. That means that despite the added expense, should oil prices fail to moderate, our revenues are still filtering to the bottom line at triple the 3% rate that you are currently reporting under a best-case scenario.
To reciprocate your concern, we have a question for you: How are your extra costs coming along. you know, the ones involved with complying with those pesky EPA clean-air regulations?
Thanks again for your interest.
Sincerely,
UPS
-- N.S.
As I said in my opening argument, Valero thanks UPS for all the business. As for the thought that Valero is in a perfect environment, or, more importantly, that its competitors are going to convert to sour crude to match Valero's price points, I have two observations.
First, higher oil prices ought to be a disaster for Valero and the other refiners, because they don't produce oil. They purchase it from the producers. The primary reason the company's had it so good is because of the spread, and because the demand for oil products is consistently exceeding refining capacity.
And second, look at that last point. Demand exceeds supply. It costs billions of dollars to convert a refinery from being able to handle only sweet crude to sour. But more importantly, it takes a substantial amount of time. Are the big refiners going to take down large chunks of capacity for the sake of making a conversion right at the moment when they already cannot meet demand? That's a very expensive decision, and one that might just lead to $4-a-gallon gas prices, if the mismatch is large enough. I don't think so. Wherever they are at this time, they're locked in for the foreseeable future. -- B.M.
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