So, putting on our investment hat, let’s look at United Parcel Service and FedEx and then at a potential competitor from the digital universe.
United Parcel Service (UPS), headquartered in Atlanta, is the big dog. With annual revenues of $51 billion, it’s already two-thirds the size of the USPS. Its bread-and-butter is packages, representing 62% of revenues. International packages account for 21%, and supply chain logistics and freight make the rest.
Flash Player 9 or higher is required to view the chart Click here to download Flash Player nowRevenues have grown in each of the past 10 years (5% and 4% in the past two years), but earnings have shrunk in each of the past four quarters, as revenue growth has slowed faster than expenses.
In the past four years, the stock has fallen from 89 to 38, and it recently rebounded to 50. This rebound might become a new uptrend, but there’s no big power behind the move, so I’m skeptical.
FedEx (FDX), headquartered in Memphis, has a lot of similar traits. With annual revenues of $38 billion, it’s two-thirds the size of UPS … or half the size of the USPS. But FedEx gets two-thirds of its revenue from express mail, 18% from ground and 13% from freight. International business accounts for 28% of its revenues.
FedEx, too, has seen revenues grow every year of the past decade (9% and 8% in the past two years), but its earnings began shrinking early in 2007.
In the past two years, the stock has fallen from 121 to 35, and it recently rebounded to 45. Technically, it looks worse than UPS.
Admittedly, both stocks might be considered cheap today; they’re well below their old highs, and the market values them at less than one year’s revenues.
But on a price/earnings basis, they’re no bargains … unless earnings can rebound in the quarters ahead. And the market appears not to expect that. Certainly analysts don’t; they’re reduced their projections for both companies for both 2009 and 2010.
—
So who’s the digital contender? Which successful digital company of today might be happy to compete for a piece of the USPS business, and to bring it into the 21st century?
I suggest Amazon.com (AMZN). Clearly, the company is skilled logistically; it’s become successful not only by selling books from retailers to individuals but by selling everything from everybody to everybody else, and getting them delivered correctly, too.
But I’m not suggesting Amazon get into the delivery business. I’m suggesting that Amazon’s Kindle, the electronic book-reader, might just be the revolutionary piece of technology that could deliver personalized paper-like content to your house, eliminating the need for so much of that paper that fills your mailbox.
And I assume the brains at Amazon are working on it.
Even without that, business is very good at Amazon. Revenues, which totaled $19 billion last year, have grown every year of the past decade (39% and 29% in the past two years), though earnings growth has been less linear. But analysts recently raised their estimates for 2009 and 2010.
Technically, the stock looks great; it’s obviously under heavy accumulation. Back on March 2, it earned a spot in Cabot Top Ten Report, where editor Mike Cintolo wrote:
“So why is AMZN so strong? In part, we think it’s because the stock is still not over-owned; fewer than 500 mutual funds own the stock. In part we think it’s because the company is truly international; 47% of revenues come from outside the U.S. In part we think it’s because the company is still achieving double-digit annual revenue growth. And in part we think it’s because the company’s Kindle, the electronic book platform, has been well received. While the company refuses to divulge sales figures, reviews of the original Kindle, and now the Kindle 2, have been quite positive. Furthermore, the ongoing implosion of the paper-based newspaper industry has created an opportunity for an electronic newsreader, and Kindle is the leading contender in the early phase of the race. In short, the stability of revenue flows from its budget-priced merchandise combined with the promise of what the Kindle might achieve make an attractive package.”
When that was written, AMZN was trading at 62. Since then it’s climbed to 75, and in the past week it’s pulled back normally to 70. So you could buy it here. But even smarter would be buying a no-risk subscription to Cabot Top Ten Report, so you’d be kept up to date on Mike’s latest recommendations.