USPS: Government-Run Businesses Can’t Compete

by Lawrence Meyers | February 7, 2013 10:20 am

It’s getting better and better to be a shareholder of Federal Express (NYSE:FDX[1]) and UPS (NYSE:UPS[2]) these days. The U.S. Postal Service will cease delivering first-class mail[3] on Saturdays beginning in August. You can practically see the ads coming: “They don’t deliver on Saturdays. We do!” True, the USPS will continue delivering express mail and packages on Saturdays, but one wonders how long it can keep that up.

The truth is that the USPS is a terrible business and is losing money. For investors, it pays to know why, so you can examine similar businesses and look for shorting opportunities. In addition, you can learn what to look for once Obamacare gets implemented. Surely, government control of this massive part of our economy will provide you with other trading opportunities.

Did you know the USPS has to file 10-K and 10-Q reports? It does. So take a look at the 2007 Annual Report[4], the 2010 Annual Report[5] and the 2011 Annual Report.[6] In the 2007 report, one can see annual results back to 2003. Tha’s when the USPS managed a $3.87 billion profit. Since then, that profit dwindled to $900 million in 2006 and then to massive multibillion-dollar annual losses every year thereafter.

Defenders will assert that this loss was the result of having to pre-fund employee pensions. First, that’s not the whole truth. Page 15 on the 2011 report shows a huge loss from operations even without the pension contributions.

Second, the fundamental flaw in government-driven businesses is providing taxpayer-funded, defined-benefit pensions to government workers at all. Why should a government worker get a guaranteed pension when private sector workers have to contribute to their own retirement plans?

Still, setting aside the pension issue, the post office obviously runs an inefficient operation. And just like government gets in the way of allowing private business to flourish via regulation, the post office also “is restricted by law from taking certain steps such as entering new lines of business, that might generate enough revenue to make up for the decline in first class mail revenue,” according to the USPS’ 2011 10-K.

Then, think about the fabulous customer service you receive at the post office. You remember the long lines? Why does it feel like the stations are unmanned, even during busy hours? Even though the Unabomber has been in jail for 17 years, the USPS still has a 13-ounce limit on items you can put into a postal box. If someone really wants to mail a bomb, they’ll surely figure out how to do it for under 13 ounces.

But don’t listen to me. Read the government-ordered report from management consultants McKinsey[7] on all the ways the post office needs to change. It’s a great lesson in how not to run a business. After that, you can remind yourself that Amtrak has never made a profit in its entire history. Then, you can start worrying about Obamacare.

The reason for all of this is the same: The government can afford to be wildly inefficient and run a terrible service because it doesn’t have to make a profit. Do you think Fedex or UPS or any other company would still be around if it were losing billions of dollars every year? No way.

But hey, it’s all for the “public good,” right? I suppose one might make that argument. But how about if it’s for the “public better,” because “good” isn’t good enough when it comes to taxpayer money for an essential service? As in, force the entity to be profitable like everyone else. We can see the results when losses are accepted.

The only way Obamacare even has a chance of being viable is its reliance on massive taxes and fines, while also being designed to force competition out of the marketplace. For states that refuse to set up the health insurance exchanges, people who don’t get insurance from their employers, will have to purchase it from the government “exchange” that will consist only of the federal government’s plan. In states where commercial insurance carriers are in an exchange, the government will undercut them on pricing because it doesn’t need to make a profit.

The end result is a form of price control: Washington will be the one that determines the top price for insurance. Nobody else will be able to compete, and government will get all the business.

This means eventually health insurance companies will get killed. Oh, it won’t happen immediately. Everyone will first think how great it is that insurance companies are going to get all this business, and the stocks will go up. Then they’ll go down — and you’ll be shorting them. This list includes Cigna (NYSE:CI[8]), Humana (NYSE:HUM[9]), Aetna (NYSE:AET[10]), UnitedHealth (NYSE:UNH[11]) and Wellpoint (NYSE:WLP[12]).

It gets worse. The government huge market share will allow it to exert leverage over pharmaceutical reimbursement. That means decreased revenue for pharma. So, you’ll want to be short Merck (NYSE:MRK[13]), AstraZeneca (NYSE:AZN[14]), Bristol-Myers Squibb (NYSE:BMY[15]) and Novartis (NYSE:NVS[16]).

Government cannot compete on a level playing field in the world of business. It should stop trying. But since it won’t, you may as well profit from its stubbornness.

As of this writing, Lawrence Meyers didn’t own any securities mentioned here.

  1. FDX:
  2. UPS:
  3. U.S. Postal Service will cease delivering first-class mail:
  4. 2007 Annual Report:
  5. the 2010 Annual Report:
  6. 2011 Annual Report.:
  7. management consultants McKinsey:
  8. CI:
  9. HUM:
  10. AET:
  11. UNH:
  12. WLP:
  13. MRK:
  14. AZN:
  15. BMY:
  16. NVS:

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